INTERACTIVE: The rising cost of keeping Malaysia's petrol prices steady

By SHYAFIQ DZULKIFLI

PETALING JAYA: Soaring oil prices have led to a sharp rise in subsidies that the government has had to bear to keep petrol pump prices steady for Malaysians.

Since the start of this year, the price of unsubsidised RON95 petrol has gone up by 76.6% from RM2.56 to RM4.52 as at Oct 1.

Ahead of the tabling of Budget 2027 on Friday (Oct 9), we take a closer look at how the surge in global oil prices has affected - and may continue to affect – Malaysia’s fuel subsidy bill.

 

Steep climb since the Iran conflict

The government launched the Budi Madani RON95 (BUDI95) programme in September last year as part of its move to transition from blanket subsidies to targeted subsidies.

Under the initiative, eligible Malaysians currently qualify for 300 litres of subsidised RON95 petrol each month at RM1.99 per litre.

The start of the Middle East conflict in late February then triggered a sharp spike in global oil prices.

 

A growing subsidy bill

On July 1, the Ministry of Finance said that the government is expected to bear almost RM40bil in petroleum product subsidies this year as a result of the increase in global oil prices following the Middle East conflict.

In a written parliamentary response, the ministry said that the government had borne subsidies of nearly RM800mil per month for RON95 and diesel in January and February 2026, before rising to around RM5bil per month in March and April 2026.

“If the current market price remains, the government is expected to bear total subsidies on petroleum products of RM40 billion for 2026,” the ministry said.

According to Khazanah Research Institute (KRI) research associate Dr Mikhail Rosli, a prolonged oil-price shock could push the amount even higher in the future.

He said Malaysia’s fuel subsidies could cost between RM45bil and RM50bil next year if Brent crude prices remain above US$100 per barrel.

He said the figure would be broadly in line with the KRI’s report, Beyond The Pump, 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.

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

 

Higher oil, bigger burden

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

Historically, higher oil prices boosted 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.”

Dr Mikhail, however, 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.

He noted that the government had previously cut the quota from 300 litres to 200 litres before restoring it when prices eased.

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

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

The government could also tighten subsidy eligibility or allow a larger share of market prices to be passed on to consumers.

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

ends