Can we still afford petrol subsidies?

 The cost of RON95 subsidies could be around RM3.2 billion wiping out savings and requiring extra funding but it may be a catalyst for reform towards tiered prices.

In a surprising move the government has altered the prices of petrol and diesel overnight, raising the price of unsubsidised RON95 and RON97 by 60 sen and hiking diesel prices by 80 sen.

Only days before the prime minister, the second finance minister and the prime minister’s senior political adviser were reassuring us that everything was fine.

The narrative was that Malaysia has secure supply until May and its status as an oil producer, along with the income generated from the sector, helps the government protect the public from the impact of rising energy prices. This is correct.

Given this, the real concern is that there is no obvious explanation for the government’s emergency reaction.

Although there was a spike to almost US$120 per barrel for Brent Crude on Monday, prices moderated significantly to around US$95 per barrel and appear to have stabilised in the US$90-US$100 range since then.

This is driven by news that the US has almost completed its aims in the Middle East, which significantly reduces the risk of a prolonged conflict. In addition, 400 million barrels of oil will be released from global reserves according to the International Energy Agency (IEA).

This is equivalent to 20 days of the 20 million barrels per day currently choked in the Strait of Hormuz.

If the Middle East conflict is short-lived, as it appears to be, the spike in oil prices can be expected to moderate quickly within weeks and hopefully within the 20 days of the IEA member states oil stock release.

In Q4 2025, the finance ministry reported that RON95 subsidy rationalisation had saved RM1.2 billion, costing RM1.8 billion or RM600 million per month. These savings are now at risk because the subsidy bill has risen almost 90% from 68 sen per litre to RM1.28 per litre.

The finance ministry now estimates the cost for one month at RM3.2 billion. This will wipe out any savings and require extra funding.

Higher unsubsidised prices on RON95 only affect foreigners, so very little is gained even from a huge 60 sen hike. It is also not obvious that higher revenues from RON95 sales to foreigners will cover the extra cost.

The hike in RON97 prices creates a big gap of RM1.86 making it almost twice as expensive as RON95. When this happened before in 2022, RON97 sales fell 65% as the price rose above RM4 per litre and people switched to RON95. If that happens again RON95 sales will surge, as will the cost of subsidies.

It is also not obvious that higher unsubsidised prices will curb smuggling and illegal sales. In fact the new prices make subsidised RON95 more attractive to anyone who wants to get cheaper illicit petrol. This raises enforcement costs.

Unfortunately this has not been well communicated. We saw a reassuring narrative on Monday, a surprise policy change two days later and no clear rationale for it.

The supplies of petrol until May should be sufficient to see Malaysia through the rest of the Middle East conflict which seems to be drawing to a close. The risk is whether the conflict is prolonged and the closure of the Strait of Hormuz continues to choke supplies.

This volatility could be a catalyst for substantial structural reforms. Bold policy reform would be to switch subsidies to a tiered pricing system which saves money and encourages consumers to economise on petrol consumption.

A tiered system might be RM1.99 for the first 50 litres per month, RM2.33 for the next 25 litres, RM2.63 for the next 25 litres and full price RM3.27 above 100 litres. - FMT

 The views expressed are those of the writer and do not necessarily reflect those of MMKtT.