Now's the best time to remove subsidy for RON95 petrol, govt told

The raging conflict in the Middle East and the likelihood of a spike in crude oil prices have raised the question of whether Prime Minister Anwar Ibrahim's government will go ahead with the removal of the petrol subsidy, four months after it cancelled the subsidy on diesel, leading to a 55% rise in pump prices nationwide.

However, analysts believe that the overall stability of crude oil prices, even as major oil-producing countries are embroiled in the biggest conflict since the end of the Iraq war two decades ago, is the best opportunity for the government to announce the removal of subsidies on RON95 petrol, the fuel used by the majority of private vehicles in Malaysia.

Economist Mohd Afzanizam Abdul Rashid said global crude oil prices remain stable, although Brent crude rose US$3 to US$74 the day after Iran's unprecedented missile strike in Tel Aviv.

The appreciation of the ringgit in recent weeks has also helped bring down the retail price of petrol, he said.

He said based on the current price of Brent crude oil of RM2.83 per litre, the price of RON95 without subsidy would be below RM3 per litre, although no accurate estimate is given.

That's still much cheaper than in April when unsubsidised RON95 cost RM3.60 per litre, which meant the government had to spend more subsidy to stabilise prices at the pumps.

This, Afzanizam said, gives the government the best opportunity to implement its long-delayed plan to remove subsidies on RON95.

"The oil market is in a very conducive position if the government wants to remove the subsidies at this time, because the difference between the market price and the subsidy price is currently the smallest since 2022," said Afzanizam, chief economist at Bank Muamalat.

Global oil prices have been the focus of every conflict in the Middle East, with record high prices during the 1979 Islamic revolution in Iran, the subsequent eight-year Iran-Iraq war, the 1990 invasion of Kuwait, the 2003 invasion of Iraq and the 2010-2011 Arab uprising.

The government currently subsidises RON95, keeping the price at the pump at RM2.05 per litre, while the higher grade RON97 petrol is not subsidised and currently costs RM3.19 per litre.

On June 10, the government announced the abolition of subsidies for diesel, causing the price at fuel stations nationwide to rise to RM3.35 per litre.

The move led to angry reactions from the public after a number of companies announced that they could not guarantee that prices of goods and services would remain the same despite a series of measures to ensure targeted subsidies reaching some industries.

Unperturbed by the barrage of criticism, Economy Minister Rafizi Ramli said the government would proceed to announce a similar measure for RON95 petrol.

"We will keep our cards close to our chest in the same way we surprised everyone with diesel. So we did surprise everyone with diesel, and I think everyone is up for another surprise," he told financial news Bloomberg in June.

There is wide expectation that the upcoming Budget 2025 will include more details on a possible restructuring of subsidies for RON95 petrol.

Meanwhile, analyst Doris Liew from think tank IDEAS Malaysia said as an importer of crude oil and petroleum products, Malaysia faces a big challenge if oil prices continue to rise due to the Middle East conflict.

She said that fiscal deficit would increase if petrol subsidies were not abolished.

At the same time, Liew warned of an increase in inflation and the cost of living if the government decided to remove the last remaining fuel subsidy.

"Given these competing pressures, a gradual removal of the petrol subsidy may be the most prudent approach. This would help mitigate the impact on consumers while gradually reducing the government's subsidy burden.

"Although, if oil prices continue to rise, implementing this strategy could become more difficult," said Liew.