INTERACTIVE: Malaysia’s fuel subsidy bill faces RM50bil risk if oil stays above US$100

By SHYAFIQ DZULKIFLI

PETALING JAYA: Malaysia’s fuel subsidy bill could approach RM50bil in a prolonged oil-price shock scenario, according to an economist.

Khazanah Research Institute (KRI) research associate Dr Mikhail Rosli estimated Malaysia’s fuel subsidy bill could cost between RM45bil and RM50bil next year if Brent crude prices remain above US$100 per barrel.

He said the estimate would be broadly in line with the KRI’s Beyond The Pump report which estimated fuel subsidies will cost around RM48 billion per year when the crude oil prices exceed US$100 per barrel and remain at that level.

However, he stressed that this remained a “tail scenario” rather than the most likely outcome.

“This remains an unlikely scenario, as the US Energy Information Administration’s base case projects Brent crude to average US$74 per barrel in 2027, while the World Bank forecasts US$70 and the IMF’s severe scenario at between US$110 and US$125,” he said.

The warning comes as Malaysia’s unsubsidised RON95 price rose to RM4.57 per litre for the week of Sept 24 to 30, its highest level so far this year.

The price has risen by RM2.01, or 78.5%, from RM2.56 at the start of the year.

Dr Mikhail said the impact on the government’s finances depends largely on how much of the higher market price it continues to absorb through the targeted subsidy mechanism.

“BUDI95 caps both price and quantity. We haven’t seen instances where the quantity becomes the binding constraint, but it is mainly the price side.

“A sustained spike therefore doesn't break BUDI95; it just makes it expensive,” he said.

Dr Mikhail said the oil shock also marked a reversal of the traditional relationship between oil prices and Malaysia’s federal finances.

Historically, higher oil prices could boost government revenue through the petroleum sector. 

“That relationship has now flipped, as recent estimates suggest that the change in the subsidy bill exceeds the change in revenue gains,” he said.

Citing estimates by Doris Liew, Dr Mikhail said an increase in the oil-price assumption used for Budget 2026 from US$65 to US$100 per barrel could generate about RM10.5bil in additional petroleum revenue but RM19.8bil in additional subsidy costs.

“That could widen the deficit by a net RM5bil to RM10bil,” he said.

However, Dr Mikhail said the oil shock was not severe enough to threaten fiscal stability.

When asked about measures to offset the shock, Dr Mikhail said one option would be to reduce BUDI95’s monthly fuel quota.

Dr Mikhail noted that the government had previously cut the quota from 300 litres to 200 litres, before restoring it after prices eased.

However, he said Treasury data showed that 95% of users consumed less than 180 litres a month. 

 

This means that another quota reduction would mainly affect higher-volume users, including e-hailing drivers and other heavy users, rather than the majority of consumers.

The government could also tighten eligibility for the subsidy or allow more of the increase in market prices to be passed on to consumers.

Dr Mikhail added that he expected the current disruption to ease as markets adjust, but said the possibility of new disruptions would depend on political decisions in the region.