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The increase in oil prices has put pressure on the global economy. Even economies that have a high degree of self-sufficiency concerning oil products are experiencing rising production costs and price increases for households energy use. Therefore, changes in energy policies are under consideration for countries highly dependent on imported energy as well as countries with a high degree of self-sufficiency. Examination of dependence on cheap energy sources for economic growth in different economic sectors is becoming more important as countries are trying to promote activities that are less energy intense. Among the policy changes under consideration, the adjustment of domestic energy subsidies is of particular interest. The effect of high energy prices on a fast growing economy, such as in Malaysia, is considerable, as the country will shift from being a net exporter of energy to a net importer in less than 10 years. Malaysia until recently has experienced increasing overall energy intensity and the growth up to 2000 was quite high, especially for electricity intensity. A continued rise in energy intensity will be quite problematic in this new high oil price regime. This paper investigates the impact of rising energy prices on production costs for the different sectors of the Malaysian economy. Input-output calculations demonstrate that the impact on the exporting component of the manufacturing sectors is less than for the average production. Therefore the production cost increase caused by, for example, an adjustment in electricity prices of 25% will result in less than ½% increase. As the competing countries in world markets are experiencing the same rise in energy costs, including electricity based on fossil fuels, there is no vital argument for not allowing domestic energy prices to adjust to the international price changes.

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