This article first appeared in The Edge Malaysia Weekly on May 25, 2026 - May 31, 2026

IN a recent interview with local radio station BFM 89.9, economic adviser at the Prime Minister’s Office Nurhisham Hussein said the current situation in Malaysia — where the public seems oblivious to the possibility of a fuel and energy shortage amid the US-Israel war with Iran — resembles the calm before the storm.

“I feel like we are in February 2020, when the [coronavirus] was just about to hit [our shores]. We were hearing all this news, yet everything was going on as normal. But by the following month, we were in [the middle of] a major crisis,” he added.

Just last week, International Energy Agency (IEA) executive director Fatih Birol said in a speech in London that the world may enter “the red zone” in July or August if the oil supply crisis brought about by the war with Iran does not improve. He added that the oil market surplus prior to the war, together with the IEA’s coordinated 400 million barrel strategic reserve release and commercial stock draws were not enough to resolve the crisis.

Since the attacks on energy infrastructure in Iran and the closure of the Strait of Hormuz, some 14 million barrels per day of oil supply have been removed from global markets. Most of Asia’s oil comes from the Middle East, hence the scarcity is very real.

While noting that the severity of the Covid-19 pandemic is not comparable to the current global energy supply crunch, Nurhisham pointed out that many people appear to be taking the situation lightly, with little change to behaviour despite the ongoing developments globally.

The reason could be because ordinary Malaysians are still enjoying subsidised petrol and have yet to feel the pain in a major way. But is the country insulated from the energy crisis? What is the situation on the ground and how prepared are we for a fallout from a prolonged oil supply crisis?

The general feedback received from businesses show that they are increasingly worried about the effects of the Middle East conflict. It is no longer just having to deal with costly fuel and logistics. The pain is being felt across their operations, from higher prices of raw materials, packaging and transport to inventories dipping to critical levels and orders slowing.

Cash flow is a major worry.

Small and medium enterprises (SMEs) appear to be among those receiving the brunt of the impact and say they are not prepared for a long-drawn energy crisis. SMEs are a major component of the economy, contributing close to 40% of the country’s gross domestic product (GDP).

“Frankly, most SMEs in Malaysia are not adequately prepared for a prolonged energy crisis, especially in terms of cash flow resilience, inventory buffering and absorbing sustained cost increases,” says SME Association of Malaysia national president Dr Chin Chee Seong.

He says that based on a recent survey conducted among its members, more than 80% of SMEs are already facing double-digit cost increases, with the majority having seen cost increases of over 20%, resulting in severe pressure on cash flow.

“Unlike large corporations, most SMEs do not have the financial muscle to stockpile raw materials, hedge against prolonged price volatility or absorb sustained cost shocks over an extended period,” says Chin, adding that this means they are largely at the mercy of market forces.

With cash flow being the lifeblood of any business operation, it is now the biggest concern for the 16,000-plus members of the SME Association, he says.

“The issue is no longer limited to rising costs, but whether businesses can survive financially if this continues. The most affected sectors remain manufacturing, logistics and transport, food and beverage, construction, retail, and distribution, as these sectors are either highly energy-intensive or deeply reliant on functioning supply chains. We are also seeing businesses freezing hiring, delaying expansion, cutting discretionary spending and shifting from growth planning to cost containment and survival management,” he adds.

Member companies of the Federation of Malaysian Manufacturing (FMM), which on May 7 released its survey findings on the crisis, are facing a similar situation with close to 70% saying they are under cash flow pressure. As SMEs made up 35% of the survey respondents, this indicates that the bigger boys are also experiencing financial strain.

FMM, which has 13,000 member companies in the manufacturing supply chain, pointed out that manufacturers are feeling the squeeze at both ends. While suppliers have demanded shorter payment terms, or advanced payment in some cases, buyers have been forced to delay payments due to disruptions in shipment or because of order uncertainty, putting manufacturers in a pinch.

Furthermore, for manufacturers with limited cash reserves, the resulting shortfall is becoming increasingly difficult to bridge, with some banks reported to have tightened lending conditions or requested additional collateral.

As businesses struggle with rising costs, customers are also tightening their purse strings.

“Some 68% of respondents report reduced or deferred orders from customers, 20% say orders have been significantly reduced and 50% report that the conflict has affected demand in Malaysia, as higher retail prices weaken consumer purchasing and squeeze manufacturer margins,” FMM said in its May 7 press statement.

Another sector having a tough time is the construction industry. In an email reply to The Edge, Master Builders Association Malaysia (MBAM) president Oliver Wee says the industry remains heavily dependent on fossil fuel for machinery, transport and plant operations, with limited contingency planning for energy supply disruption.

“In our industry, procurement goes through a work schedule. Consumption and availability of materials will have to be tailored to the programme of work and it is hard to stockpile materials as it will impact cash flow,” he explains, adding that if the situation worsens, the effects will be severe.

According to Wee, while the construction industry is not facing any critical supply issues at this juncture — mainly due to a reduction in demand — he is uncertain what will happen in the next one or two months. Nevertheless, he notes that circumstances have made the current way of contracting unworkable because increases in raw material costs are not limited to the 15% to 35% range, but can also double, depending on the materials.

“The biggest worry for the industry currently is the unsustainability of traditional fixed-price contracting in an era of extreme market volatility. When contracts become too rigid and risks are unfairly transferred to one party, projects eventually suffer,” he points out.

As a result, contractors are facing cash flow pressure, an increase in claims and disputes, and the slower progress — or in some cases, the abandonment — of projects.

“Ultimately, the end users and purchasers become the real victims. The construction industry needs a new way of contracting,” says Wee.

“This is not about protecting contractors alone. It is about protecting projects, safeguarding buyers, preserving delivery timelines and ensuring the sustainability of the entire construction ecosystem.”

The cash flow crunch could lead to businesses, especially SMEs, being forced to scale down their operations or consider temporary closure if the situation worsens.

The manufacturing sector that depends on suppliers for its raw materials is particularly vulnerable because certain materials cannot be easily substituted and it would be impossible for the companies to absorb cost increases indefinitely.

“While it would be premature to suggest widespread permanent shutdowns at this stage, based on current sentiment and sector vulnerability, it would not be unreasonable to estimate that between 20% and 30% of the most vulnerable SMEs may be forced to temporarily scale down production, reduce operations or suspend certain activities in the next three months if the situation deteriorates further or remains unresolved,” says SME Association’s Chin, adding that the risk will escalate if energy prices climb sharply or the raw material shortage intensifies.

Meanwhile, FMM’s survey highlighted that 28% of respondents had made or were planning to make workforce adjustments as a result of the impact from the Iran war. Adjustments include reduced overtime, shortened working hours and hiring freeze. A small percentage of the companies had resorted to retrenching workers.

Surely, this will lead to lower disposable incomes for workers, who will then be forced to consume less.

“The situation is dire, but I think people are quite oblivious to it. We don’t think much about how much energy we consume in a day. It stretches beyond the fuel at the pump. Natural gas prices have also increased substantially and it is a significant component of electricity generation in Malaysia,” says an observer who is in the energy sector.

Beyond the potential head-on impact from higher energy costs, the indirect effect will come from petrochemicals, which can be found in almost everything in modern living, from personal hygiene products to fertilisers. The supply of petrochemicals has shrunk, with a third of it stuck in the Strait of Hormuz, resulting in the soaring prices of petroleum derivatives.

Malaysian Plastics Manufacturers Association president Cheah Chee Chon says where polymer is concerned, the  supply of feedstock eased recently as many plastic converters are now importing from China. However, he warns that a prolonged Middle East conflict would result in high polymer prices. “This will have an inflationary impact on downstream industries such as food, electrical and electronics, medical, construction and automotive,” he adds.

This means consumers have to be prepared for higher prices resulting from a higher inflation rate. Are Malaysians ready for this?

CGS International Securities economist Ahmad Nazmi Idrus says consumers have not fully recovered from the high inflation after the Covid-19 pandemic in 2022. He points out that the average private consumption growth from the post-pandemic economic reopening to the present works out to just 5.1% annually — far below the average of about 7.3% to 7.9% in the years before the pandemic.

Meanwhile, wage growth in the country is lagging that of productivity. In Bank Negara Malaysia’s Economic and Monetary Review 2025, it pointed out that wages have grown only modestly in the last decade. It grew at a compound annual growth rate (CAGR) of 3.3% between 2010 and 2019, but fell below productivity growth during the Covid-19 pandemic.

While it has since recovered, Bank Negara highlighted that the 0.9% CAGR for wages from 2019 to 2024 remained below pre-pandemic levels and lagged productivity growth. Wages only caught up with cumulative productivity gains in 2024.

Nevertheless, the central bank noted that even at the current stage of productivity development, Malaysian workers receive a relatively smaller share of the national income compared with those in the region or advanced economies.

“All these are pointing towards the fact that consumers are facing this upcoming inflation crisis from a weaker position than before. When consumers are weak, businesses will be affected as they have limited pass-through,” Nazmi explains.

This situation where Malaysia’s employed are already pinching pennies is likely to further complicate the government’s move to reduce fuel subsidies.

Diesel and petrol carry a weightage of 0.2% and 5.5% respectively in the Consumer Price Index basket, says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre. “Every 10% to 15% increase in retail petrol price is estimated to contribute about 0.6 to 0.9 percentage points to the headline inflation,” he adds.

The amount spent on fuel subsidies in Malaysia is staggering. Since the war broke out in the Middle East, the government’s subsidy bill for fuel alone has reached RM4 billion to RM7 billion a month. It was RM700 million a month before the war.

In the radio interview, Nurhisham said the government is subsidising fuel at a staggering RM1,700 per second. That number fluctuates, depending on the price of crude oil.

There is much contention over whether the government can continue to subsidise petrol at the pump at such a rate if crude oil prices continue to be at elevated levels. It has already reduced the monthly quota for RON95 petrol for Malaysian drivers from 300 litres to 200 litres a month.

However, the savings from the 100 litre reduction is minimal given that the majority of those eligible for subsidised RON95 petrol do not use more than 100 litres a month.

“A further reduction from 200 litres to 100 litres could also have a limited impact, but a reduction to below 100 litres could see fuel consumption patterns more impacted,” says OCBC senior Asean economist Lavanya Venkateswaran.

According to Nurhisham, the government has confirmed that there is now sufficient oil for the country for the month of June, while supply for July is about 70% to 80% secured. While this does not warrant panic, it could mean Malaysians should start being more conscientious about their consumption of fuel and energy.

“Resource management is a two-way street. If global supply tightens and our inventories run low, we cannot afford to maintain business-as-usual consumption. Without a voluntary shift in public behaviour, the introduction of mandatory, strict conservation protocols would become inevitable. This could be a stricter fuel quota or structured rationing to stretch every drop we have,” says UOB Malaysia senior economist Julia Goh.

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