OVER the past one month, escalation in the Middle East conflict sent shockwaves through global energy markets, driving oil prices higher, increasing operational costs and causing disruption to supply chains.
The biggest risks that the current geopolitical environment-inflicted soaring energy prices pose to businesses are shocks, volatility and uncertainty.
Rising oil prices have threatened micro, small and medium enterprises’ (MSMEs) viability.
The surge in global oil prices towards US$120 per barrel and petrol as well as diesel prices are placing enormous operating cost pressures on businesses, especially SMEs.
Significant increase in fuel prices cascade through the entire economy – freight, logistics, construction materials, high-energy manufacturing, retail supply chains and hospitality.
The ripple effects are unavoidable: fuel affects production, logistics, and raw materials, amplifies existing vulnerabilities in supply chains, and all of these influence costs, margins and profitability as well as business planning budgets.
Beneath this operational pressures lie a deeper and more uncomfortable question: Is there a way out? How to build business resilience?
Businesses are facing five simultaneous pressures as follows:
> Direct and indirect cost shocks. Rising fuel costs increase operating costs across the logistics, construction, manufacturing, retail and hospitality sectors.
Indirect costs are escalating due to severely disrupted maritime traffic, carriers rerouting and extending transit times, cancellation of bookings, and significant increase in freight surcharges, causing “cascading” effects on global supply chains. Suppliers’ price increases quickly erode businesses’ already thin margins.
> Rising raw material costs. Increasing fuel prices are significantly driving up raw material costs, causing a ripple effect in many industries such as contractors, construction, manufacturing, food processing, and heavy machinery, as well as services-related tourism and hospitality sectors.
The surge in diesel prices increases transport and logistical costs, while also boosting production costs for materials with high embedded energy like cement, steel, chemical products, and machinery operations.
> “Stagflation” squeeze. While businesses have incurred increased operating costs, consumers’ discretionary spending will weaken as households cope with high living costs.
That means businesses face higher cost expenses at the same time revenue growth slows.
> Margin compression. Rising fuel costs can squeeze business margins as companies cannot fully pass on increasing input costs to consumers, often due to low market power, fierce competition, or long-term fixed-price contracts.
Some companies preserve their margin through small, incremental rate adjustments without causing severe sticker shock for customers.
> Cash flow tightness. Many MSMEs facing rising fuel costs and increasing operating costs will experience cash flow tightness and may face difficulty servicing their loans.
Uncertainty has significantly clouded business visibility in the current intense geopolitical landscape.
Among the dampening factors are surging fuel costs, transportation/logistic costs, raw material costs due to the supply chains disruption, shipping costs and air freight rates.
Raw materials and inputs prices are a critical consideration for firms when making production and pricing decisions.
Heightened uncertainties concerning the supply of raw materials and input prices, the scale and duration of the oil shock, as well as supply chain disruptions have resulted in both suppliers and manufacturers taking a cautious stance in committing to ordering and purchasing.
There are cases of suppliers being unable to provide pricing of raw materials due to cost fluctuations on a weekly basis, and hence, not taking new orders, pending more clarity.
Some suppliers have sent new price increase notices to their customers while some have already increased prices.
Some manufacturers have adopted a “wait and see” approach, not committing to large purchases, and a just-in-time inventory as they do not want to lock in raw materials at higher prices and be caught with high-cost inventory.
They are hoping that the war would de-escalate and can purchase new deliveries at lower wholesale prices.
SMEs’ viability is being shaped by cumulative cost pressures. In 2024 to 2025, they were already operating on tight margins, dealing with rising business costs, including wages, new taxes, regulatory and compliance costs.
Fuel is another critical input layered on top of that. When multiple cost pressures such as rising fuel prices, raw materials, transportation, including shipping and insurance costs move at once, it reduces the SMEs’ buffer to absorb shocks.
Many are already absorbing higher costs, passing cost increases through where they can. When those costs rise quickly, the pressure flows directly into MSMEs’ margins.
When these pressures compound, it can delay investments and reduce hiring. And, in some cases, it can push otherwise viable businesses into cash flow and financial distress.
The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Quick Take Survey noted 51.2% of the respondents indicated that total cost will increase between 6% and 20%, and 20.2% will experience cost increases by more than 20%.
Close to 46.3% of total respondents will experience “moderate and significant deterioration” in their cash flow. The overall impact on a company’s profitability varies between a slight decrease (as indicated by 31% of respondents), a moderate decrease (33%) and a significant decrease (26.6%).
Most respondents have perceived “moderate to significant deterioration” of business outlook over the next three to six months if the oil shock persists.
The results indicated that 31% of total respondents can maintain their business operations between three and six months before requiring structural downsizing or seeking additional financing.
The reality is MSMEs have limited ability to manage soaring fuel prices and supply chains disruption on their own.
Unlike larger corporations with strong balance sheets that can hedge fuel costs or absorb supply chain shocks, smaller operators and SMEs often feel the impact within weeks.
Business survivability is indeed crucial. For many enterprises, particularly MSMEs which had suffered sustained increases in operational costs over the past two years, the primary goal is to avoid financial distress or closure.
The current period of global uncertainty and challenging situation highlights the need for a more stable and supportive operating environment.
Businesses need lower costs, simpler compliance and the confidence in the government’s ability to navigate this oil shock through a mixture of targeted subsidies, and strengthening structural resilience.
Measures that can help to ease business costs burden and relieve cash flow include:
> Targeted Repayment Assistance Programme, including loans restructuring for affected MSMES for a specific period.
> Lower service tax rate (currently at between 6% and 8%) imposed on the expanded services (rental/leasing, and professional fees, construction, private healthcare, and education) for a period of three months, subject to review every three months depending on the prevailing situation.
> Lower the current 85% minimum of the estimated tax for the preceding year (CP204) to 50%, suspend the 10% penalty if the final tax exceeds the threshold by more than 30%.
In addition, to allow any overpaid tax to be offset against the current year’s liabilities, given that businesses have limited visibility on their current performance.
> Review time of use (ToU) electricity tariffs and raise higher the eligibility threshold under the energy efficiency incentive to at least 600kWh from 200kWh to encourage broader energy savings for MSMEs.
The government should provide targeted support for SMEs to adopt energy-efficient machinery through tax incentives and soft loans, aiming to reduce dependence on fossil fuels and lower operational costs, supporting long-term structural transformation. Other measures to consider are:
> Reducing sales and service tax (SST) on energy products, or implementing “green levies” tax breaks.
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.
> Provide accelerated depreciation, which allows firms to deduct the full cost of energy-efficient equipment from their taxable income in the year of purchase.
> Provide soft interest rate loans for firms to invest in energy-efficient machinery and equipment, automation technology, and advanced motors.
Businesses can adopt the following strategies for managing fuel price fluctuations:
> Implement a well-structured fuel surcharge formula based on fuel price variations to be reviewed regularly, protecting profit margins while communicating surcharge clearly to customers to maintain transparency.
> Optimise efficient route planning to minimise fuel consumption by reducing unnecessary mileage and idle time.
> Tracking and analysing fuel usage to identify inefficiencies and opportunities for cost reduction.
> Investing in fuel efficiency technology, fuel-efficient vehicles and alternative fuel technologies to help reduce dependency on fluctuating fuel prices.
> Implement strategic pricing which entails small, incremental rate adjustments to offset rising expenses without causing severe sticker shock for customers.
> Renegotiate supplier terms, consolidating orders or exploring new supply chains to minimise disruptions and yield cost efficiencies.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
