THE minor panic caused by the Budi95 “technical glitch” that happened recently – the monthly RON95 quota limit was displayed as 150 litres instead of 200 litres – is proof again of how all Malaysians are hooked on cheap petrol to fuel our vehicles, especially during long weekend breaks when many take to the roads for local holidays.
It is a drug that we have not been able to get off since the automatic pricing mechanism, a formula first implemented in 1983 to stabilise retail petrol and diesel prices, was introduced.
Malaysia was then an industrialising economy, less wealthy, the middle-class was smaller and around a fifth of households were in absolute poverty.
It is a different economy today, diversified with manufacturing and services sectors that contribute to around four-fifths of growth on average. It is a far wealthier country, poverty has been reduced and there is a burgeoning, albeit under-siege middle class contending with low wages and higher living costs.
The Middle East conflict is really an opportunity to re-examine our relationship with this drug. It does not look like the United States and Iran can come to an agreement anytime soon, which means volatile oil prices are here to stay for long.
Even if an agreement is ironed out, bombed out energy infrastructure need time to be rebuilt.
The prolonged conflict is bad news for government coffers, because of the amount that has to be spent on maintaining the Budi95 subsidy, currently at RM1.99 per litre for RON95 petrol, versus the market price of RM3.92 for the period May 28 to June 3. The fuel subsidy rose to as high as RM7bil for both RON95 petrol and diesel in April from RM700mil before the conflict.
There are many views on how to manage this spending or mitigate the impact on government coffers.
There is a suggestion to raise the RON95 petrol price back to RM2.05, which is the pre-Budi95 subsidised price. Another is to exclude Malaysians in the T20 income bracket from getting the subsidised fuel and redirect the savings to deserving groups as aid.
However, no one suggests that fuel subsidy for all Malaysians be abolished.
The implications of all that spending on the fuel subsidy are not just for the present, but will be felt down the road. Spending to develop the economy may slow down as the government prioritises maintaining the Budi95 subsidy amid political pressure and concerns over cost-of-living issues.
There will probably be less for a rainy-day fund too.
For a start, austerity measures are being implemented by the government. Early last month, it sent out a Treasury circular to ministries and related agencies to review their operational expenditures with the aim of slashing up to RM10bil in spending.
With no end to the ongoing conflict and periodic escalation sending oil prices higher, more spending cuts will be needed, and that could come through delaying spending on development.
Most economists believe the government will miss the fiscal deficit target of 3.5% of gross domestic product (GDP) this year compared to 3.7% last year as the Budget 2026 allocation for the fuel subsidy is below what they forecast the government to spend because of the elevated oil prices.
If the economy can grow faster, perhaps the impact on the deficit and spending can be less as the extra revenue from taxation can help cushion the shortfall, but growth is slowing down, with first-quarter 2026 (1Q26) GDP expanding 5.4% compared to 6.3% in 4Q25.
GDP for 2Q26 has been estimated to be around 4% to 5% while for the rest of the year, the growth rate is projected to be 4% to 5% on average compared to 5.2% growth in 2025.
Reducing the subsidy through price and quota adjustments is a difficult economic dilemma for the government as it weighs the burden of cost-of-living pressures on the people against the fiscal deficit strains.
And then, there are the political realities, says Socio-Economic Research Centre executive director Lee Heng Guie.
He says any adjustment to the RON95 price of RM1.99 remains a “last resort” due to the wider impact on households’ cost of living and spending, with the government considering other options such as cutting the quota to 200 litres from 300 litres as the first choice.
“Finding a balanced solution to ensuring fiscal sustainability with social equity requires strong political will.
“A gradual adjustment of subsidised price, while maintaining the fuel quota at between 150 and 200 litres, sends a signal to consumers that fuel is scarce and valuable, and behavioural consumption shifts are economically necessary,” Lee says.
“Over time, the government can consider operating the RON95 price on a weekly managed float system and adjust dynamically based on global crude oil prices, paired with cash assistance for targeted users,” he adds.
Eventually though, Malaysians will have to confront the question of the fuel subsidy and how it is unsustainable in the long run, even if the economy is doing well and the government’s fiscal position improves.
It will be like undergoing collective drug rehabilitation.
The question they should be asking is how fast a pace the subsidy for all fuel – petrol and diesel – should be removed for everyone, and what mechanism can be implemented to direct aid to the right groups, such as tripling cash aid.
