KUALA LUMPUR: Rising global oil prices driven by escalating geopolitical tensions in the Middle East could gradually ripple through Malaysia's broader economy, pushing up business costs and eventually feeding into consumer prices.
Dr Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia Bhd, said industries that rely heavily on fuel and energy, such as transport, manufacturing, and services, are likely to feel the pressure first.
Logistics, utilities, and food and beverage businesses are among the sectors most vulnerable to rising costs over the next six to twelve months, he said, while rental prices could also trend higher as operating expenses increase.
Manufacturing industries that consume large amounts of energy, including iron and steel, textiles, cement, and glass, could see higher production costs if electricity and gas tariffs rise.
Service-based sectors such as hotels and leisure operators may also face margin pressure as operating expenses climb.
Fuel subsidies cushion short-term impact.
Dr Afzanizam added that Malaysia's fuel subsidy framework continues to provide short-term protection against the immediate effects of rising oil prices.
"The government oil price assumption for the 2026 budget stands at US$60 to US$65 per barrel and the prevailing Brent crude oil prices are hovering around US$82 per barrel. Should the Brent crude go into US$100 per barrel for a prolonged period, it might have an impact on the government's budget," he said.
He said that sustaining fuel subsidies under such conditions would increase the government's financial burden, even with ongoing tax adjustments and subsidy rationalisation measures aimed at creating fiscal flexibility.
Second-round effects and inflation risks
While subsidies help absorb the initial shock, Dr Afzanizam said second-round effects could eventually spread across the economy through higher logistics and transportation costs, which are key components of household spending.
Malaysia's headline inflation currently stands at about 1.6 per cent, with projections pointing to around 2.2 per cent by year-end, closer to the country's long-term inflation averages. However, sustained oil prices above US$90 per barrel for several quarters could lead to stronger cost pass-through into domestic prices.
Sunway University economics professor Dr Yeah Kim Leng noted that headline inflation this year is approaching the five-year average of 2.3 per cent and the ten-year average of 1.8–2.1 per cent, excluding deflation during the COVID-19 recession.
He explained that while Malaysia's fuel subsidies partially shield consumers and transport operators from the first-round effects of the oil price shock, the second-round effects in the coming months will gradually affect all industries, particularly heavy energy users.
"The affected industries include industrial products and consumer goods. Among the heavy users of gas and electricity in the manufacturing sector are iron and steel, textiles, cement, and glass products, while those in services include hotels and leisure industries.
"These industries will be impacted eventually when tariffs are adjusted higher due to fuel cost increases," he told Business Times.
Targeted support can mitigate inflationary pressures.
Dr Yeah added that higher fuel pump and transport fare prices are the immediate key risks but the effects can be calibrated through the fuel subsidy scheme to lessen the financial burden on households and basic service providers.
Transport costs, utilities and food and beverages are most vulnerable over the next six to 12 months. Rentals will also creep up and business costs rise as the oil price shocks cascade gradually through the economy, he said.
He said that targeted support along the supply chains is effective in securing commitment from industry players not to raise prices, thereby averting the knock-on effects on consumer prices. Delays in implementing cost-containment measures could, however, dampen inflation expectations and exacerbate price pressures.
"If profit margins are squeezed to unsustainable levels, the cost pass-through will happen more quickly. The resilience of each business will be tested, and depending on market characteristics such as number of players, competition intensity, demand conditions and consumer behaviour, such as sensitivity to price changes, the cost pass-through will vary widely.
"Based on previous episodes, headline inflation averaged 3.4 per cent during the 2011-2014 period when oil prices hit US$125 per barrel. In 2022, when oil prices reached US$120 a barrel, Malaysia's CPI inflation touched 3.3 per cent," Dr Yeah said.
Ringgit stability provides some cushion.
Dr Yeah said Malaysia's strengthening ringgit serves as a buffer against imported inflation.
"The pass-through of higher international prices to domestic producer prices and eventually to consumer prices has lagged effects that surface only if the world oil price is sustained at above US$90 a barrel for a considerable period of more than one or two quarters.
"The key variables are inventory levels, demand conditions and competitive intensity that vary across industries. Given the country's strong fundamentals, including being a net gas exporter, the risk of a sharp currency depreciation is much lower compared to energy-importing countries," he said.
Dr Afzanizam noted that the ringgit trading within the RM3.90 to RM4.00 range against the US dollar helps moderate inflationary pressures.
"A stronger ringgit reduces the cost of imported goods, while a weaker one has the opposite effect," he said.
While Malaysia may benefit from higher crude prices as an exporter, Dr Yeah warned that prolonged volatility in the ringgit and global markets could offset these gains.
"The gains as an exporter nation, while helping to shore up Malaysia's economic stability and investment attractiveness, are likely to be negated by a global economic slowdown and financial market turbulence should the war mirror that of the Russia-Ukraine conflict," he said.
Samuel Tan, founder and chief executive officer of Olive Tree Property Consultants, echoed their concerns, noting that prolonged currency and market volatility could increase the cost of imported intermediate goods and escalate the national fuel subsidy burden.
He said if Brent crude remains sustained above US$90, the rising fiscal cost of domestic subsidies can outpace the incremental revenue gains, potentially straining Malaysia's fiscal flexibility.
"Though a stronger ringgit provides a critical buffer, price stability remains highly vulnerable to such external shocks. If the currency depreciates sharply or Brent exceeds US$90, the pressures on escalated inflation will be higher. This leads to a higher cost of living across the board," Tan said.
On household spending, Tan advised that non-essential expenses would be most affected over the next six to twelve months.
"Discretionary spending on non-essential expenses will be the most affected. Examples are entertainment, travel and expensive dining out. Middle-income households will likely focus on "wants" rather than "needs". Covering necessities such as housing, food and utilities will be the priorities," he said.
Overall, both economists and Tan said market confidence remains intact, particularly among foreign investors, supported by consistent economic policies and stable governance.
However, they cautioned that the situation remains fluid. A combination of ringgit depreciation and sustained oil prices above US$100 per barrel could sharply raise import costs, complicating inflation management.