Having estimated the oil price at US$65 per barrel less than six months ago when tabling Budget 2026 in parliament, Putrajaya probably did not expect to see the commodity above US$80 per barrel or consider the need to tap into the flexibility of its Budi95 targeted fuel subsidy for RON95 petrol this soon.
The latter may well continue to hold true should the geopolitical tensions reverse in the coming weeks. But the likelihood of tapping into the flexibility of the targeted fuel subsidy arose on Feb 28 when the US and Israel launched air strikes on Iran, effectively leading to the closure of the Strait of Hormuz that accounts for one-fifth of the global oil and gas supply. That sent the benchmark Brent crude oil above US$90 per barrel at press time, up more than 20% from about US$73 per barrel before the attack killed Iran’s supreme leader.
The following day, Prime Minister Datuk Seri Anwar Ibrahim was quick to reassure the electorate of no petrol price shocks while retaining a degree of fiscal flexibility. “For the people of Malaysia, I will try to ensure there is no increase in fuel prices. We will give the maximum effort to hold off [on raising prices]. But [the market] is beyond our control, and we cannot guarantee there won’t be any price increase.”
At the current juncture, it remains to be seen if Putrajaya will need to exercise the flexibility it has in reducing its RON95 fuel subsidy burden by adjusting higher the RM1.99 per litre price, which is among the top 10 lowest in the world.
At the time of writing, the RON95 subsidy was about 68 sen per litre, with unsubsidised RON95 retailing at RM2.67 per litre, just one sen above the highest rate of RM2.66 per litre that the fuel had retailed at since end-September 2025.
RON95 at RM2.05 could save Putrajaya RM1 bil
Brent crude oil’s price surge stalled briefly on March 6 after the US allowed the sale of Russian oil to India for 30 days as a stopgap measure to ease what US Treasury Secretary Scott Bessent called Iran’s attempt to “take global energy hostage”. Yet the Strait of Hormuz remains closed.
“Should Brent crude hit the US$100 per barrel level, we think there is scope for the government to increase the Budi95 price back to RM2.05 per litre, which would add another 10 basis points to headline inflation while reducing the annual subsidy bill by about RM1 billion,” the economists at CIMB Treasury and Markets Research, led by head of research Michelle Chia, wrote in a March 3 note, expecting inflation to be “manageable” even if the subsidised RON95 petrol were to return to RM2.05 per litre.
They expect every US$10 per barrel increase in Brent crude oil to raise Malaysia’s real GDP growth by 0.06% to 0.1% and petroleum-related revenue by RM3.5 billion. However, there is a potential net fiscal loss of RM1.6 billion (0.08% of GDP), with the RON95 and diesel subsidies possibly increasing by a greater amount of RM3.8 billion and RM1.3 billion respectively, all else being equal. Assuming that the ringgit remains stable at around 3.85 against the US dollar and the Budi95 price is kept unchanged at RM1.99 per litre, every US$10 per barrel increase in Brent crude oil is expected to raise headline inflation by 0.1 percentage points in 2026.
Additionally, the CIMB economists reckon that a US$5/MMBtu increase in natural gas prices is expected to increase the liquefied natural gas (LNG) subsidy by about RM500 million, equivalent to an additional -0.03% of GDP, to bring the total potential loss to -0.11% of GDP.
CGS International Research economist Mas Aida Che Mansor expects Putrajaya’s subsidy bill to rise by RM10.9 billion in 2026 if Brent crude oil remains at about US$84 per barrel this year — significantly outweighing the RM5.7 billion in additional revenue from higher Brent crude oil prices versus the Budget 2026 assumption of US$65 per barrel.
That is more than the old rule of thumb, where every US$10 per barrel rise in Brent crude oil would lift government revenue by RM3 billion while increasing the fuel subsidies by RM3.5 billion to RM4 billion, resulting in a negative but manageable fiscal impact.
It is not immediately certain how much the difference will be because of the higher ringgit against the US dollar, with the local currency hovering between 3.89 and 3.95 at the time of writing, compared with between 4.10 and 4.20 versus the greenback when Budget 2026 was tabled.
US$100 per barrel only if Iran conflict is prolonged
The experts at UOB Global Economics and Markets Research told clients in a March 6 note that there is currently only a 15% likelihood of Brent crude oil surging above US$100 per barrel and possibly testing its high of US$130 per barrel, which they only expect to occur in a “worst case” scenario, where the US-Iran conflict lasts six to 12 months, with US President Donald Trump seeking a regime change and control of Kharg Island (Iran’s primary offshore oil export terminal), causing significant damage to energy structures in Iran and the Gulf states.
They see 60% probability of Brent crude oil hovering between US$80 and US$90 per barrel in the near term before easing back to US$75 per barrel, assuming that the US-Iran conflict lasts four weeks, with the US successful in neutralising Iran’s missile and nuclear programmes and with limited attacks on energy structures.
The experts reckon that there is a 25% chance of the US taking up to three months to neutralise Iran’s missile and nuclear programmes, causing more material damage to energy structures, in which case Brent crude oil could hover between US$90 and US$100 per barrel for many weeks before easing to US$80 per barrel.
While acknowledging that the risk of “a short-term spike in Brent crude towards US$100 per barrel is now decidedly higher”, their longer-term view is that Opec has ample capacity to dampen any excessive spike in energy prices.
The UOB economists updated their Brent crude oil forecast to US$90 per barrel in 2Q2026 before easing to US$85 per barrel in 3Q2026, US$80 per barrel in 4Q2026 and US$75 per barrel in 1Q2027, with the ringgit seen at 3.98 against the US dollar in 2Q2026, 3.94 in 3Q2026, 3.90 in 4Q2026 and 3.85 in 1Q2027, with inflation staying manageable at about 2% and Bank Negara Malaysia likely to keep the overnight policy rate (OPR) unchanged at 2.75% throughout 2026.
“As geopolitical risks fade, Malaysia’s favourable idiosyncratic factors should reassert themselves,” they added, noting that Malaysia is “less energy price sensitive than many peers, thanks to sizeable LNG exports and targeted subsidies to cushion the effects on households”.
Separately, UOB Bank Research senior economist Julia Goh said in a March 5 note that when keeping the OPR unchanged on March 5, the central bank had “kept its constructive view on Malaysia’s domestic outlook, supported by persistent income-related measures, ongoing implementation of national master plans, progress in multi-year investment projects, supportive budgetary measures, higher tourism activity, the ongoing AI upcycle and contained domestic inflation without notable demand-driven price pressures”.
“The central bank also emphasised that Malaysia is confronting the uncertainties surrounding the ongoing conflict in the Middle East from a position of strength, underpinned by robust domestic growth, moderate inflation, a sound financial sector and a resilient external position,” wrote Goh, who expects Bank Negara to provide further clarity on its assessment of the country’s outlook this year amid rising external downside risk when releasing its 2025 annual report and economic review by March 31.
PETRONAS and reaping the benefits of reform
Putrajaya has added fiscal flexibility, having reduced petroleum-related revenue to RM43 billion or 12.5% of total projected federal government revenue in 2026, mainly due to lower dividends from Petroleum Nasional Bhd (PETRONAS) that was pencilled in at only RM20 billion for 2026 — the lowest since RM16 billion in 2017 — and down from RM32 billion in 2024 and 2025.
The national oil company’s dividend makes up only 4.8% of Budget 2026, the lowest in 23 years percentage-wise and half of its 10-year average of 9.5%, our back-of-the-envelope calculations show.
The ongoing legal dispute between PETRONAS and Petroleum Sarawak Bhd (Petros) may well have contributed to Putrajaya’s conservative stance. That is because 60% of Malaysia’s natural gas reserves are in Sarawak, which also accounts for the lion’s share of the country’s LNG exports and a significant driver of the national oil company’s earnings.
The developments on Budi95 will also be watched in the coming months.
Minister of Finance II Datuk Seri Amir Hamzah Azizan previously said Putrajaya will study the usage data from the implementation of the Budi95 programme for at least six months to determine if there is a need for further fine-tuning of the mechanism to cut leakages.
The end of March will mark the first six months of Budi95, which reduced RON95 petrol to RM1.99 per litre from RM2.05 per litre effective Sept 30, 2025, with added concessions given to registered logistics and delivery drivers to keep a lid on secondary price impact on consumer essentials such as food. Malaysians consume 83 litres of RON95 a month on average, with 90% using less than 200 litres a month, Treasury secretary-general Datuk Johan Mahmood Merican said in January.
The RON95 subsidy fell to about RM1.8 billion in the fourth quarter of 2025 (4Q2025) from RM3 billion in 4Q2024, the Ministry of Finance told parliament on March 5, attributing the decline to lower oil prices and the targeted subsidy via the Budi95 initiative.
Incidentally, the government will only allow Malaysians to buy subsidised 1kg poly packs of cooking oil from March 1 this year to cut leakages, taking a leaf from the Budi95 initiative that allows only Malaysians with a valid driving licence to buy up to 300 litres of RON95 fuel per month at a subsidised price of RM1.99 per litre, plus the smooth running of the Sumbangan Asas Rahmah (Sara) targeted cash assistance to all Malaysians above the age of 18, with the MyKad verification as a way of rechannelling savings from the subsidy rationalisation to the people.
While the benefits reaped may be small in the larger scheme of things, it is a move in the right direction.
Source : https://theedgemalaysia.com/node/795665
