The government today said it was reviewing its oil subsidies and may introduce a round of cuts as the price of oil hit a new record of US$70 a barrel in Asian trading.

The government has raised petrol and diesel prices four times since last October in a bid to cut the soaring cost of its subsidies.

"We are now reviewing it," Deputy Finance Minister Ng Yen Yen was quoted as saying by the official Bernama news agency.

"Reducing oil subsidies would indirectly increase economic productivity," she added.

Ng said the government was studying the impact of any reduction in oil subsidies on consumers and the economy for the 2006 budget, expected to be released on Sept 30.

"We must look at both sides of the coin. We cannot study one side and forget the other one. The government will need to take the necessary action to address it," she said.

Subsidies for petroleum cost Malaysia RM4.8 billion last year and are expected to reach RM6.63 billion this year due to rising prices.

Oil prices hit new record highs Monday after crossing US$70 a barrel in Asian trading as a powerful hurricane threatened the crude-producing Gulf of Mexico region in the United States.

Higher inflation rate

At the start of the afternoon session at 2.52pm, the Kuala Lumpur Composite Index lost 7.66 points or 0.83 percent to 910.72, which analysts attributed to oil prices and weakening corporate results.

Spiralling petrol prices and transportation costs saw Malaysia's inflation rate hit a six-year high of 3.2 percent in June, and analysts said there would be further inflationary pressure over Monday's price rises.

"This is definitely going to spook the market because there are already worries about inflation and the impact on consumption growth," said Vincent Khoo, Head of Research for Hwang-DBS Vickers brokerage.

"There are two worries. One is further cuts in subsidies, which means a further rise in petrol prices and indirectly this will cause another bout of general price hikes," he told AFP .

"You can also see regionally some companies blaming inflationary pressures for the earnings shortfall, so it's definitely bad for the economy," he said.

"This is one of the major dampeners for the market for the rest of the year."

Wong Chee Seng, Chief Economist with ECM Libra Securities, said the concern for Malaysia as a net oil exporter was the "second round effect from global weakness" which would affect the country's economy.

He also said some measures might be introduced in the budget to deal with the fallout.

"The government might introduce some fiscal measures in the coming budget. It might cut or harmonise import duties or liberalise certain licensing requirements to moderate inflationary pressure," he said.

The government has said that fuel subsidies will eventually be scrapped to ensure they did not take away much needed funds for the development of schools and rural infrastructure.