KUALA LUMPUR, March 9 — Malaysia may be able to maintain the price of RON95 fuel at RM1.99 per litre even if global oil prices rise amid tensions around the Strait of Hormuz, but doing so could increase fiscal pressure and affect fiscal consolidation plans, said an economist.
CGS International Securities Malaysia chief economist Nazmi Idrus noted that the government has taken measures to wean the country off its dependence on fuel subsidies, such as restructuring the diesel and RON95 subsidy system last year.
However, the overall subsidy commitment, as a share of gross domestic product (GDP), has remained relatively high compared to levels before the pandemic. In addition, the country’s fiscal deficit and government debt situation require continued fiscal consolidation.
“At current conditions, a spike in the fuel subsidy costs could potentially overturn the fiscal consolidation trajectory that the government has planned. In a way, it is actually a smart move for the government to signal the potential price risk, as it reduces business uncertainties and allows the public to prepare for such eventualities. This is better than keeping quiet,” he told Bernama.
Recently, Prime Minister Datuk Seri Anwar Ibrahim had said that Malaysia could maintain the RON95 price ceiling at RM1.99 per litre for about two months if geopolitical tensions escalate.
Nazmi noted that Malaysia has been a net oil importer since 2022 and that its domestic fuel prices are determined through the automatic price mechanism (APM), which is benchmarked against the Mean of Platts Singapore (MOPS), a key pricing reference for refined petroleum products traded in the region. MOPS is the main pricing reference across Southeast Asia, including Thailand, Vietnam and Indonesia, and is also widely used across the broader Asia-Pacific market, including Australia and South Korea.
The economist said that MOPS and global crude benchmarks such as Brent and West Texas Intermediate tend to move together, meaning changes in global oil prices affect Malaysia’s domestic fuel pricing.
Nazmi said tensions in the Strait of Hormuz could also raise shipping rates, insurance premiums and logistics costs for refined petroleum products moving into Asia, adding that prolonged disruptions could feed into inflation.
He added that if Brent crude averages about US$84 per barrel this year, Malaysia’s consumer price index growth could increase by around 15 basis points. He noted that Malaysia’s oil balance has been weakening as production declines from ageing fields while domestic consumption continues to rise.
Nazmi said if Brent crude averages about US$84 per barrel this year, compared with US$65 assumed in the federal budget, subsidy spending could rise by about RM10.9 billion against RM5.7 billion in additional oil revenue, widening the fiscal deficit by about 0.2 per cent of GDP.
Centre for Market Education chief executive officer Dr Carmelo Ferlito said the Strait of Hormuz remains a critical chokepoint in global energy trade, with about one-fifth of global petroleum liquids passing through the waterway. He said that when the route is at risk, traders immediately build a geopolitical premium into crude and refined products.
Ferlito added that higher global oil prices did not automatically translate into greater fiscal space for fuel subsidies through Petroliam Nasional Bhd (Petronas). He said that while stronger oil prices can improve Petronas’ cash flow and petroleum-related government revenue, dividend payments were not automatically indexed to short term price spikes and might not fully offset higher subsidy outlays.
Higher upstream revenue can also be offset by rising downstream subsidy costs when global fuel prices increase, meaning windfall oil revenue may only partially cushion the fiscal impact, Ferlito said.
