US-Israeli strike on Iran could push up Malaysia’s oil revenue – but also its subsidy bill

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KUALA LUMPUR – Global oil prices jolted higher after the US-Israeli strike on Iranian targets triggered retaliatory attacks from Tehran, raising fears of a broader Middle East conflict that could choke a critical shipping lane.

Brent crude – the global benchmark for oil prices – briefly spiked to about US$78 per barrel on March 2 before easing slightly as traders weighed the risk of wider disruption.

For Malaysia, the concern is less about supply and more about the bill. Higher crude prices boost petroleum revenues, but they also drive up the cost of fuel subsidies that the administration has struggled to rein in – threatening to undo months of difficult work to bring government spending under control.

Economists warned that if elevated prices persist, the government will face renewed pressure to either absorb the extra cost or pass it on to consumers at a politically sensitive time.

“Regional conflicts come in different degrees, depending on the scale and duration of the Middle East conflicts,” Socio-Economic Research Centre executive director Lee Heng Guie told The Straits Times.

“If the war is contained within a short period, say between one and three months, the impact may be limited.”

However, he cautioned that a prolonged escalation disrupting supply routes or energy infrastructure could have much wider consequences.

“If it worsens and escalates into serious proportion and is prolonged, severely disrupting supply, the direct and indirect impact on the global economy will be more significant, and could threaten a global recession,” Mr Lee said.

At the centre of market anxiety is the Strait of Hormuz, a narrow but critical waterway along Iran’s southern coast through which a significant share of the world’s crude oil and natural gas flows. Even the risk of disruption there can send traders scrambling, pushing up prices on fears of supply shortages.

Markets have reacted this way before. When Russia invaded Ukraine in February 2022, crude prices surged almost overnight amid fears of supply disruption.

That war, now in its fourth year and still unresolved, reshaped global energy flows and contributed to inflationary pressures worldwide.

Subsidy scheme under strain

For Malaysia, higher oil prices bring both upside and risk.

Mr Lee estimated that stronger crude prices could generate an additional RM2.5 billion (S$810 million) to RM3 billion in petroleum-related revenue for every US$10 increase per barrel in oil price, providing a short-term boost to government income.

But the gain comes with pressure, as Malaysia continues to shield consumers from global price volatility.

Malaysia maintains a targeted fuel subsidy scheme that keeps the retail price of RON95 petrol at RM1.99 per litre with a 300-litre quota per month. Average consumption is below that, meaning most households consume less than the monthly cap and face no unsubsidised top-up.

Even so, if global crude prices remain elevated for months, the overall subsidy bill could still climb significantly.

“Under a worst-case scenario, if global oil prices remain high at US$90 per barrel for a prolonged period, such as beyond six months, it may become difficult to maintain the current RON95 price,” Mr Lee said.

He added that sustaining subsidies may require modest adjustments rather than full absorption of the higher burden.

“The government may have to move the subsidised price a little bit higher. The subsidy can continue, but at a slightly increased price,” he said.

He said this approach would allow the subsidy to continue in principle, while asking the public to bear a slightly increased portion of the cost, thereby preventing a total collapse of the fiscal balance.

Amid the volatility, the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, announced in an official March 1 statement that they would raise production by 206,000 barrels per day from April, describing the move as part of efforts “to support market stability”.

While the increase is intended to cushion supply concerns, its effectiveness ultimately depends on whether transport routes and energy infrastructure remain secure.

Dr Ahmed Razman Abdul Latiff, an economist at Universiti Putra Malaysia’s Putra Business School, said the impact of higher oil prices extends well beyond government accounts.

When crude rises, fuel costs for shipping, aviation, trucking and manufacturing increase, pushing up the cost of imported goods, raw materials and food inputs. These higher costs are often passed along the supply chain.

“The impact on the price of products and services will not be immediate, but the impact on the price of petrol and diesel will be faster,” Dr Razman said, noting that contracts and inventories can delay price adjustments for other goods.

Political pressure builds

Beyond the fiscal calculus, the stakes are also deeply political.

Sustained high oil prices could widen the fiscal deficit if subsidy bills outpace petroleum-related revenues. But the pressure would also strain households and small businesses through reduced purchasing power and tighter profit margins.

This economic pressure is amplified if global economic growth slows at the same time, further diminishing consumer confidence.

Dr Razman urged Malaysians to prepare for uncertainty.

“Households should start building savings, avoid taking on new loans unnecessarily, and spend only on essential items when the need arises,” he said.

Professor Mohd Izani Mohd Zain of Universiti Malaysia Terengganu said rising fuel prices and living costs could carry political consequences for the government in the next general election.

With the Hari Raya festive season approaching, any adjustment to the RON95 price cap could quickly draw public attention. Prime Minister Anwar Ibrahim on March 1 said the government would make “maximum effort” to maintain the fuel subsidy, while acknowledging that global oil prices are largely beyond Malaysia’s control.

“People are sensitive to subsidy issues because they directly affect daily life compared with overall economic achievements,” Prof Izani told ST.

Dr Muhammad Fathi Yusof of Universiti Teknologi Malaysia said the government’s best defence would be transparency on spending priorities if subsidy pressures intensify.

“The global economy was more fragile during the Covid-19 period, yet the government’s support mechanism at that time appeared convincing,” he said.