IN 1972, President Richard Nixon announced a seismic shift in the global economic order. With a simple televised address, he severed the link between the US dollar and gold, replacing it with a new anchor: oil.
Thus was born the petrodollar system, tying the fortunes of the world’s currencies to the ebb and flow of oil prices. For Malaysia, an oil-exporting nation, this moment ushered in decades of dependency—a dependency made worse by the introduction of petroleum subsidies.
The subsidy policy, Automatic Price Mechanism (APM), was formally introduced in 1983 under then Prime Minister Mahathir Mohamad. Mahathir’s vision of industrialising Malaysia relied heavily on affordable energy to keep production and transportation costs low, fostering economic activity and improving access to essential goods and services.
Politically, the subsidies helped maintain public support during a period of rapid urbanisation and economic transformation. However, it laid the foundation for decades of dependency that would later strain the country’s fiscal and economic systems.
Today, that policy has become an albatross around the neck of Malaysia’s economy. While it may have provided short-term relief to consumers, it has sapped the nation’s fiscal strength, weakened the Ringgit, and stunted economic innovation. Now, Prime Minister Anwar Ibrahim faces a critical decision: end petroleum subsidies or risk dragging Malaysia into deeper economic turmoil.
How subsidies made Ringgit a money fire pit
In 2014, Brent crude oil prices fell from $100 to $50 per barrel, and the Ringgit plummeted from 3.20 MYR/USD to 4.20 MYR/USD. This trend has repeated every time oil prices decline.
The Ringgit, tied to oil prices due to Malaysia’s status as a net oil exporter, has become less valuable because of a policy that diverts revenues from development to waste. Instead of using this wealth for infrastructure and innovation, Malaysia has literally been burning through it—subsidising decades of unsustainable use of inefficient combustion engines and power generators. With subsidies eating into government revenues, Malaysia is forced to borrow more, further eroding the Ringgits worth.
Anwar’s plan to wait until June 2025 to reform petroleum subsidies is a gamble that Malaysia cannot afford.
U.S. energy policy shift
With Donald Trump’s re-election, the U.S. will flood the market with oil, lowering prices further. For Malaysia, a fall in oil revenues would mean fiscal deficits, increasing the likelihood of a currency crisis.
Every month of delay means billions more spent on maintaining an unsustainable policy. By June 2025, Malaysia could lose over RM10 billion in reserve currencies. The Ringgit, now already hovering around 4.50 MYR/USD, reflects a lack of fiscal confidence. Ending petroleum subsidies is not just about saving money—it’s about repositioning Malaysia for a more resilient economic future.
The Path Forward
The petrodollar system that began in 1972 tied nations like ours to the highs and lows of oil markets. Now, petroleum subsidies threaten to drag Malaysia’s economy further into the abyss.
The Prime Minister must act decisively. Ending subsidies is not just a fiscal necessity; it’s a moral imperative to secure Malaysia’s future. The longer the wait, the greater the risks—to the Ringgit, to Malaysia’s economy, and to the livelihoods of its people. It’s time to break free from the subsidy trap and embrace a future built on innovation, sustainability, and resilience. – November 17, 2024
Tuan Muda is a Scoop reader
