A sharp rise in fuel subsidy spending to RM3.2 billion highlights the unsustainable fiscal strain and deep market distortions caused by Malaysia’s long-standing policy of cheap fuel
PETALING JAYA: A staggering jump in fuel subsidy spending is more than a fiscal anomaly – it is a flashing red warning that Malaysia’s long-standing reliance on artificially cheap fuel may be reaching a breaking point, said an economist.
Prime Minister Datuk Seri Anwar Ibrahim recently revealed that government fuel subsidies had surged from around RM700 million to RM3.2 billion in less than a week following a spike in global oil prices due to the Middle East conflict.
Centre for Market Education CEO and economist Carmelo Ferlito said the sharp increase is not only unsustainable but also reflects a deeper structural problem.
“Subsidies and anything that alters market prices are fundamentally wrong. Malaysia and other countries have built their economies around adjusted prices, creating a kind of dependency.”
He warned that the longer such policies persist the more painful the eventual withdrawal would be.
Ferlito said the figures highlight how quickly subsidy burdens could spiral when global oil prices rise, particularly amid geopolitical tensions such as the Strait of Hormuz crisis.
“The figure is precisely the kind of warning sign that shows why blanket fuel subsidies are fiscally dangerous.”
He said while Malaysia may absorb the surge temporarily such spending could not be sustained if high oil prices persist.
He added that based on government estimates, if global oil prices hit about US$90 (RM355) per barrel, Malaysia could spend around RM23.8 billion on RON95 subsidies and this could climb to RM31.3 billion if prices reach US$110 (RM434).
As of press time, oil is hovering around US$100 (RM394) per barrel.
Ferlito warned that beyond fiscal strain, prolonged subsidies reshape behaviour in ways that hurt the economy.
“When fuel is persistently underpriced consumers and firms treat cheap energy as normal rather than exceptional.
“Over time, that weakens price discipline, delays efficiency improvements and discourages investment in public transport or energy-saving technology.”
He said the tipping point is reached when subsidies stop being a temporary cushion and instead lock the government into ever-rising spending, leaving less money for other essential areas.
“Economically, that tipping point has already been reached long ago.”
Ferlito said the government’s stance reflects political caution rather than economic boldness.
Echoing concerns about long-term distortions, Doris Liew, an economist specialising in Southeast Asian development, said Malaysia’s government-controlled fuel pricing system, while effective at easing inflation, carries hidden costs.
“Fuel subsidies act as a stabilisation tool, smoothing inflation during periods of external price shocks,” she said, adding that controlled pump prices help contain cost-of-living pressures and business input costs in the short term.
She said this stability is partly artificial.
“Insulating domestic fuel prices from global market signals masks underlying inflationary pressures, creating an artificially moderated inflation environment.
“Inflation is not eliminated, but redistributed through imported goods and supply chains still exposed to global energy costs. Persistently low fuel prices also weaken incentives to improve efficiency or shift to alternative energy,” said Liew.
“There is less incentive to adjust energy usage, invest in efficiency or transition towards alternative energy sources. Over time this can entrench structurally higher fuel consumption and delay necessary economic adjustments.”
Asked what would shock Malaysians most if subsidies were cut tomorrow, Ferlito said it would not just be higher prices but also the realisation of how dependent society has become on cheap fuel.
“The deeper shock would be structural – how much of household budgeting, commuting habits, business logistics and even political expectations have been built around artificially cheap energy.”