PETALING JAYA: Budget 2026 may have to rely less on revenue from crude oil and liquefied natural gas (LNG) as the energy market fundamentals are pointing toward weaker prices next year.
Higher crude production by the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) as well as other producers, along with new LNG supply capacity coming online in 2026, all point to lower prices.
This comes amid risks of weaker demand due to a slowdown in economic activity following the United States’ new tariff regime.
The benchmark Brent crude oil contract price is down 15% year-on-year (y-o-y) and forecasts suggest it could ease further to the low US$60 per barrel in 2026, as more supply returns to market.
The bias for LNG prices is also to the downside, barring any supply shocks.
To note, Malaysia exports about 25 million tonnes of LNG annually, along with roughly 200,000 barrels per day of high-grade sweet crude oil.
In Budget 2025, petroleum-related revenue was forecast at around RM62bil, accounting for 18.3% of the federal government’s total revenue.
Of this, dividends of RM32bil from national oil company (NOC) Petroliam Nasional Bhd (PETRONAS) made up more than half.
Economists, however, do not seem overly concerned about the likely decline in oil-related revenue in relation to Budget 2026 outlays.
“Malaysia’s dependency on oil and gas (O&G) income in funding the budget has been on a declining trend due to the diversification of revenue sources, but the total remains sizeable enough to result in a smaller budget allocation with low oil prices projected for 2026.
“An offsetting factor is the rise in economic activities associated with lower oil prices, as higher household income and corporate profits will raise both direct and indirect tax revenue,” Sunway University economics professor Dr Yeah Kim Leng told StarBiz.
Nevertheless, while revenue from sources such as the sales and service tax (SST) is growing, oil income remains vital to budget planning.
It is important to have a good forecast of oil prices to understand revenue from the PETRONAS dividend and taxes, said Dr Geoffrey Williams, economist and founder and director of Williams Business Consultancy Sdn Bhd
He said the assumption of US$80 per barrel in Budget 2025 was reasonable, but geopolitical uncertainty has caused volatility, with the average outcome now around US$70 per barrel.
The Brent crude oil contract was last seen trading at about US$67 per barrel.
“For Budget 2026 a lower assumption might be prudent, say US$60 to US$70 per barrel. At least this would give a pleasant bonus if prices prove higher,” he said.
In the meantime, the government is exploring new revenue streams, including a hike in SST, which is anticipated to yield about RM10bil in 2026, and subsidy rationalisation, which, while not generating new revenue directly, frees up funds for reallocation.
Williams estimated that subsidy rationalisation could save as much as RM17bil, if the most optimistic is achieved.
“This is a significant saving, which makes up any loss from oil revenue,” he said.
The government has estimated savings of at least RM4bil from the diesel subsidy cut and RM2bil to RM3bil from the rationalisation of RON95 fuel subsidies.
Additionally, the expansion of SST in July is expected to bring in RM5bil in 2025.
Yeah estimated that for every US$1 decline in global oil prices, Malaysia’s tax revenue falls by RM200mil to RM300mil.
Based on this, a downward revision in the oil price forecast – from US$70 to US$60 per barrel – could result in a revenue loss of RM2bil to RM3bil.
“The latest reported savings from the RON95 subsidy rationalisation will be able to cover the revenue gap,” he opined.
PETRONAS dividend remains a wild card. It reported a 19% y-o-y decline in earnings to RM26.2bil in the first half of 2025 (1H25).
For the full year 2024, earnings were down 32% y-o-y, yet PETRONAS still maintained a dividend of RM32bil, supported by its strong cash position.
The NOC could be asked to dig into its cash reserves again if external headwinds – such as potential sector-specific tariffs the White House may impose – begin to impact tax revenue from Malaysia’s electrical and electronics exports.
However, it could offset weaker O&G prices through higher production volumes.
According to MBSBS Research, PETRONAS achieved first hydrocarbon output from six domestic projects and three international projects in August.
These milestones contribute to its production goals of raising total production of two million barrels of oil equivalent per day (mmboe) by 2025 to 2027, up from 1.7 mmboe per day in 2024, despite ongoing global market challenges.
Williams noted although PETRONAS’ performance in 1H25 has been impacted by price volatility, the NOC is still likely to deliver a dividend of at least RM30bil for use in Budget 2026.
“This may not be sustainable in the long-term. It would be better for the government to change tack on PETRONAS income and save it in a Malaysian Superfund rather than using it for current spending,” he advised.
The country could follow the Norwegian model, which built a significant sovereign wealth fund that now provides annual dividends in perpetuity.
Norway’s fund delivered a 13% return in 2024 and has achieved an average long-term return of 6.4% per year, he said.
PETRONAS will also have to cut back on its capital expenditure plans if it upstreams more dividends to the government, Yeah said.
Nevertheless, the trade-off will have to be carefully deliberated by both the government and the NOC to avoid risking a downgrade from rating agencies.
The government will also need to consider the potential revenue impact from any settlement in the ongoing dispute with Sarawak government-owned Petroleum Sarawak Bhd.
Budget 2026 is set to be tabled on Oct 10.
TA Research expects a budget allocation of RM425.5bil for Budget 2026, representing a 3.3% increase, comprising RM341.5bil for operating expenditures and RM84bil for development expenditures.
For comparison, Budget 2025 was RM421bil, making it the largest budget in the country’s history.
