The price of petrol will increase by a hefty 10 sen per litre and diesel by 20 sen per litre effective 12 midnight.

Petrol RON97 will now cost RM1.52 per litre (up from RM1.42), RON92 RM1.48 (up from RM1.38), while diesel will be 108.1 sen per litre (up from 88.1 sen).

In Sabah, RON97 will cost RM1.50, RON92 RM1.48 and diesel 108.4 sen while in Sarawak, RON97 will be sold at RM1.51, RON92 at RM1.48 and diesel at 107.8 sen.

The 7 percent (for petrol) to 23 percent (for diesel) increase will be the sharpest hike in oil prices in recent years. Last year, the price of petrol was increased twice - 2 sen on May 1 and 5 sen on Oct 1 .

Previously, petrol prices had increased by 1 sen in Nov 1, 2002 , while diesel was increased by 2 sen.

According to Bernama , the cabinet made the decision to increase the cost of petrol to put a lid on the payment of oil subsidies by the government.

If prices were not raised, the government would have to bear a subsidy payment of RM8.96 billion and would have to forego RM7.85 billion in terms of tax exemption.

The government would then have to incur a loss of RM16.8 billion.

Gov't saves RM2.2 bil

With the new prices, the government would only need to pay RM6.7 billion in subsidies, saving RM2.2 billion a year.

In 2004, the government had paid out RM4.8 billion in subsidies for petroleum products.

The Prime Minister's Office argued that the subsidies were not the best way to help the poor and certain sectors because it created market distortion which led to inefficient utilisation of resources.

The subsidies also lead to abuse like the sales of subsidised products to those not entitled to them, and the cross-border smuggling of petrol which meant that Malaysians were even subsidising foreigners.

It added that the hike in oil prices would narrow the gap between the market price and the subsidy price, and could lead to a reduction in abuse and smuggling activities.

Last month, the Manila-based Asian Development Bank urged Malaysia and three other countries - India, Thailand and Indonesia - to lift their oil subsidies.

"Current market conditions should be taken as an excellent reason to push through with reform, as the fiscal costs rise and as the escalation in the oil price may be more than just transitory," it said.

The government said that despite the increase, the price of petrol in Malaysia - an oil exporter - would still be the cheapest in Asean, except Brunei, while for diesel, it would be the lowest except Indonesia and Brunei.