ASIAN governments are actively implementing swift policy responses to high energy prices and security risks, including inflation-suppressing measures such as fuel subsidies, price caps, work-from-home, lower-day workweek, providing incentives for energy conservation and releasing strategic petroleum reserves.
Countries with weaker fiscal balance sheets find themselves in a challenging dilemma where continued subsidy spending becomes fiscally unsustainable as it reduces budget spending in education, healthcare, and infrastructure.
Some governments may have no choice but to allow prices to rise sharply, which will reduce disposable income, push up inflation and weigh on domestic demand.
Countries with no or minimal fuel subsidies as well as deregulated fuel prices focus on demand management, targeted social support, and accelerated investment in alternatives energy.
Malaysia’s status as a net crude petroleum importer, uneven net petroleum products exporter and net liquefied natural gas exporter creates a mixed exposure to global energy shocks, if it is prolonged.
While high energy prices boost export earnings and oil-related revenue for the federal coffers, a prolonged shock presents a significant risk of imported inflation and increased fiscal pressure from fuel subsidies.
The impact of energy shocks is indeed multi-fold, acting as a “cost-push” shock that increases production costs and restraining consumer spending that ripples through the domestic economy, affecting production and investment, fuelling inflation, dampening household welfare, and threatening financial stability.
A coordinated approach to mitigate energy shocks must comprise a mix of targeted, time-limited fiscal support for vulnerable households, businesses and sectors, alongside long-term strategic investments in energy diversification and efficiency.
The design of options, policy response and support measures need to balance the following objectives, taking into account the duration of global energy shocks (temporary or permanent), fiscal space and fiscal cost, strategic petroleum reserves as well as the targeted sectors.
Preserving fiscal space
In 2025, the implementation of targeted fuel subsidies, electricity re-targeting, and the dismantling of price controls and subsidies for eggs, have resulted in savings estimated at RM12.8bil.
These savings were redirected to fund public services and social welfare programmes, as well as cash assistance programmes. The relief measures should be cost-effective, placing a premium on providing time-bound and targeted support.
Soaring oil prices have caused monthly fuel subsidy bills to surge to RM3.2bil (RM2bil for RON95, RM1.2bil for diesel) from RM700mil previously.
Protecting poor and vulnerable households, which spend a greater share of their incomes on energy expenses and are likely to experience substantial hardship when their costs of living spike, will be key.
Facilitating gradual adjustment to energy supply shocks in anticipation of a persistent oil price spike is inevitable.
Policy attempts to fully offset or postpone these adjustments are likely to be counterproductive and fiscal costly.
Allowing for a “pass-through” of higher prices ensures that market signals are preserved, which facilitates essential adjustments in consumer behavior and encourages energy-saving investments.
Energy and food security are two most critical interconnected sectors during the oil shocks, as they directly dampen economic stability, industrial output, and pressurise the cost of living for vulnerable households.
Abrupt surges in energy costs can impair company balance sheets, causing liquidity risk and cash flow problems, reduce new investments and potentially cause bankruptcies among otherwise viable firms, which can cause long-term economic scarring.
Policies should focus on providing support to viable high-energy intensity firms and small and medium enterprises.
Options to optimise policy response
There is a central dilemma for policymakers managing energy shocks, as it delineates between the short-lived and persistent scarring due to the exceptional uncertainty about the energy-inflicted cost and scale of the impact.
Effective communication, transparent data management will also help.
Data completeness, targeted and clear communication are critical in drawing an effective demand-side management, instilling public trust, and causing behavioral change. Incomplete or opaque data leads to inefficient responses, while transparent and timely communication allows for targeted action and making timely adjustments.
For example, the weekly announcement of fuel prices should state the average price of crude oil used; provide the amount of fuel consumption and amount of subsidies for RON 95 and diesel consumption, respectively, on a monthly basis, as well as state the strategic petroleum reserves.
Transparent and consistent information is essential for engaging the public. Periodic sharing information on energy usage and subsidies saving helps build confidence and encourages active participation in energy-saving efforts.
Using a mix of channels, such as dedicated websites, social media, and traditional media, helps in spreading the message effectively.
Fuel price and quota adjustment
The threshold and pricing could be calibrated gradually to strike a balance between protecting households, safeguarding fiscal space and inducing behavioral change in fuel consumption as well as energy conservation behavior.
While temporary measures that suppress retail fuel price increases can be implemented quickly, easy to administer and be communicated to the public, it does not only hamper energy-conserving behavior but also cost-ineffective and fiscally costly as well as causes distortionary effects.
A large gap of RM1.28 per litre between subsidised (RM1.99) and unsubsidised RON95 price (RM3.27), RM1.77 per litre for diesel (subsidised price of RM2.15 versus RM3.92 unsubsidised price) offers high profit arbitrage potential, leading to black market activities, smuggling and potential shortages of the subsidised products.
In the interim measure, the government can consider to reduce the subsidised quota to between 150 litres and 200 litres from the 300 litres quota at RM1.99 per litre, to reduce the arbitrage; and adjust the fix subsidised price gradually, for a start by between RM0.20 and RM0.30 per litre for a period of three to six months, and review accordingly.
The government can consider to raise the subsidised diesel price and fix a quota in Sabah, Sarawak, and Labuan, which has been maintained at RM2.15 per litre, compared to that in Peninsular Malaysia, which have been floated and increased to RM3.92 per litre for the weekly period ending March 18, 2026.
Step up in monitoring, enforcement is another crucial factor.
There is a high tendency for smuggling driven by arbitrage – the exploitation of price gaps between regulated (subsidised) prices and market prices, requiring a combination of stepping up enforcement and real-time tracking, intensive border surveillance, inter-agency coordination, and curbing fuel smuggling.
Support for industries, businesses
> Review time of use (ToU) electricity tariffs: Review the electricity tariffs under the ToU scheme; and to raise higher the eligibility threshold under the energy efficiency incentive (EEI) to at least 600 kilowatts and hour (kWh) from 200kWh to encourage broader energy savings for micro, small and medium enterprises.
> Tax relief: Reducing the sales and service tax (SST) on energy products, or implementing “green levies” tax breaks can reduce the overall tax burden on consumers and industries during price spikes.
These include electrical equipment, pumps, compressors, boilers, converters, and furnaces used in manufacturing processes, which are subject to a 5% to 10% sales tax.
A full SST waiver on solar equipment to boost renewable energy growth; provide accelerated depreciation, will also allow firms to deduct the full cost of energy-efficient equipment from their taxable income in the year of purchase; and providing a repayment assistance programme for badly affected SMEs facing financial stress.
> Windfall profit taxes: Adopt temporary taxes on windfall profits of energy providers to generate revenue to finance support measures for consumers and businesses.
> Export credit insurance, and loans: Provide soft interest rate loans for firms to invest in energy-efficient machinery and equipment, automation technology, and advanced motors.
An implementation of co-funding for the purchase of energy-efficient machinery and equipment; enhance export credit insurance schemes to mitigate energy shocks-inflicted exports risk, supply chain disruptions, and rising operating costs, is another option.
> The agriculture sector can be provided targeted subsidies for fertiliser, fuel, and electricity to help farmers and producers manage immediate costs increase.
> The construction sector’s concerns over escalating fuel and raw materials costs would cause increased costs on contractors undertaking government projects, leaving little room for the fixed-price contracts for maneuvering.
In many cases, these pressures force contractors to absorb extra costs, potentially leading to lower profit margins or project delays.
Hence, the government can consider to implement the variation of price clauses to provide financial relief and better project management solutions.
> The tourism sector will be impacted by restrained international tourists from the Middle East and Europe due to higher jet fuel prices, airspace restrictions, and costlier flight fares.
The government can consider to provide temporary fuel subsidies to domestic inbound tourist transport operators facing higher operating costs due to the surge in fuel costs.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
