The move, announced by Domestic Trade and Consumer Affairs Minister Datuk Shahrir Samad, is one of the government measures to cut the rising subsidy bill for petrol, diesel and gas, which is expected to cost RM56 billion this year.

To offset the higher fuel price, the government will offer rebates to motorists.

Under the scheme, vehicles below 2,000cc will receive a RM625 rebate annually to compensate for 800 litres of fuel used under the new price.

Motorcycles will be given a rebate of RM120. The money will be paid through postal orders.

Besides fuel, the government subsidises and control prices on a list of essential items to keep prices low, but fuel subsidy constitutes the biggest expenditure to stabilise prices.

Apart from the huge drain on the national budget, smuggling is one unwanted side effect and another strong argument for removing artificial price controls.

But with many Malaysians used to low petrol prices relative to the world market, removal of subsidies will always be an unpopular and politically difficult decision to make.

Hence, restructuring the fuel subsidy so that the selected needy group will not be hard hit by much higher open market prices seems the reasonable option to take.

Shahrir has said under the new subsidy system, fuel would be subsidised based on need rather than usage.

A straight forward subsidy as granted previously meant those who benefit most are those who use the most fuel, for instance, owners of large-capacity engine vehicles. They are mostly in the high-income bracket, the group that can most afford to pay full market price for petrol or diesel.

A new scheme also had to be considered due to the escalating subsidy bill likely to top RM56 billion if world crude prices don’t pull back from the current level of around US$130 a barrel. Diesel is subsidised by RM2 a litre.

The government last raised prices for gasoline, diesel and liquefied petroleum gas in February 2006, when crude oil futures were near a then-record high of about US$70 a barrel.

The recent ban on petrol and diesel sale to foreign-registered vehicles at the northern border was explained as not wanting visitors to come into the country just to buy subsidised fuel.

Foreign-registered motorcycles, though, are exempted as a reprieve to low-income earners in Thailand and Singapore.

Shahrir has also said that with food prices going up, “we have to think if subsidising petrol alone is worthwhile. The challenge is also to try to maintain food prices at a reasonable level.”

On Malaysian owners of Singapore-registered vehicles, he said while he sympathised with them, the 50km ban was just a minor inconvenience. “I think Malaysians who are paid wages in Singapore dollars and who buy Singapore cars should be able to accept the inconvenience and go and buy petrol outside Johor.”

MCA Youth secretary-general Datuk Dr Wee Ka Siong, though, has urged that such drivers be exempted from the ban because they are Malaysians obliged to drive Singapore-registered cars to their island workplace.

He is also against the blanket 50km ban and instead asked that Singaporeans be allowed to buy petrol at unsubsidised prices. He appealed that rules imposed on Johor should be “practical.”

Malaysia will remove price controls on gasoline and diesel, allowing pumps to sell fuel at world market prices in an attempt to reduce the government’s ballooning subsidy bill.

The new price structure will start in August, and retail cost of the fuel “will depend on global market prices,” Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad said.

Gasoline, diesel and gas are heavily subsidised at present. The subsidy is expected to cost the treasury RM45 billion this year, which the government says the increasing subsidy bill is becoming untenable.

It says Malaysians who can afford to pay global prices should do so.

Lower-income group of people, however, will be given subsidy in other forms — cash handouts and fuel quotas, Shahrir was quoted as saying by the national news agency Bernama.

Details of the new system will be released tomorrow, he said.