Malaysia unlikely to adjust fuel subsidies despite Middle East risks: economist

Malaysia is unlikely to implement near-term changes to its fuel subsidy framework despite rising geopolitical risks from the Middle East, said Lavanya Venkateswaran, senior Asean economist at OCBC.

"Fiscal policy reforms over the past few years are bearing fruit, affording the government the policy room to adopt a wait-and-see approach," Venkateswaran wrote in a March 17 report, noting that authorities are under limited pressure to adjust fuel pricing despite increased market volatility.

The government continues to cap RON95 gasoline at MR1.99/liter under the Budi95 mechanism, with subsidy costs highly sensitive to global oil prices.

If global oil prices average $100/b, the subsidy bill is estimated at around MR24 billion (1.1% of GDP), while at current year-to-date levels of about $72.7/b, the subsidy bill is closer to MR12.5 billion (0.6% of GDP), said Venkateswaran.

Each $1/b increase in oil prices raises government revenues by around MR300 million, excluding Petronas dividends, but increases subsidy costs by MR400 million-MR500 million, resulting in a net fiscal gap of about MR150 million per $1/b rise.

The dividends from Petronas are budgeted to narrow to MR20 billion from MR32 billion in 2025, Venkateswaran said.

While higher prices could support upstream earnings, uncertainty remains over dividend flows from Petronas, the state-owned energy giant that dominates Malaysia's upstream sector. "The authorities noted that it is too early to tell whether Petronas will benefit or not from higher oil and gas prices, considering the pipeline of committed capital expenditures, higher logistics and shipping costs as well as the ongoing dispute with Sarawak," said Venkateswaran.

Petronas contributed 43% of the country's total upstream investment, followed by Sarawak Shell's 23%, according to S&P Global CERA data. Its net liquids and gas resources are approximately 10 billion barrels of oil equivalent, as of February 2026.

Malaysian authorities have also signaled limited urgency to tighten subsidy parameters. Government data shows that 95% of eligible users consume less than 100 liters of subsidized fuel per month, limiting the need for immediate adjustments.

Risk exposure

Despite its upstream strength, Malaysia remains structurally exposed to global energy market disruptions, as a net crude importer with an uneven downstream fuel balance.

According to CERA estimates, Malaysia's crude and condensate production was 448,545 b/d, and refinery runs were 745,058 b/d in 2025. S&P Global Commodities at Sea data shows Saudi Arabia and the UAE were the two major suppliers in the year.

Gasoline supply remained structurally short, with domestic consumption at 283,490 b/d exceeding production of 237,116 b/d in 2025, requiring imports of 222,656 b/d to meet demand. Diesel markets were comparatively better supplied, with production of 269,153 b/d exceeding consumption of 229,443 b/d.

Naphtha remains constrained by limited domestic output, with consumption of 103,984 b/d outpacing production of 95,168 b/d despite balanced import and export flows.

Malaysia imported around 44,000 b/d of Middle Eastern naphtha, with limited domestic production constraining its feedstock flexibility. "While some volumes are reexported, a prolonged supply constraint increases the likelihood of force majeure announcements, tighter spot availability and sharper feedstock cost pass-through to downstream chemical products," CERA analysts said in a report March 9.

In fuel oil, imports from the Middle East totaled around 180,000 b/d in 2025. While a significant portion is reexported, disruptions matter less for Malaysia's domestic balance than for the regional supply chain, according to CERA analysts. Logistical risks may also arise if disruptions at key Middle Eastern hubs, such as Fujairah, alter trade routes, increasing pressure on Malaysian ports, including Port Klang and Tanjung Pelepas, the analysts said.