The government says Malaysians who can afford to pay global prices should do so, while the lower-income group will be subsidised in other forms, either as cash handouts or fuel quotas.
Details of the new fuel subsidy system, expected to cost the treasury RM45bn ($14bn) this year, are expected to be released on Wednesday.
Petrol, diesel and gas are heavily subsidised in Malaysia, ranking the country's fuel prices among the lowest in Asia.
On Monday, Malaysia began enforcing a ban on petrol sales to foreign-registered vehicles near the border to Thailand, where regular petrol is sold at $1.01 a litre.
In Malaysia, petrol sells for $0.60 a litre which is less than half the price in neighbouring Singapore. The average per litre price of petrol in the US is about $1.
Gains and losses
As a net oil exporter, Malaysia gains from high oil prices, reaping $77.6m a year in revenue for every $1 rise in crude prices.
But the government's fuel subsidy bill has jumped along with skyrocketing prices of crude oil in the world market, forcing it to find alternatives to ease the burden on its finances.
Domestic fuel prices in many developing countries remain capped despite the doubling of oil prices in the past 12 months.
Critics of fuel subsidies say they promote demand by allowing consumers to continue guzzling oil, pushing up world prices.
Governments, however, are beginning to respond as they see their subsidy bills shoot up.
Indonesia and Taiwan cut fuel subsidies last month and India is debating action.
In Sri Lanka, local media reported a government proposal to float fuel prices and suspend the import of vehicles for a year.