Malaysia recently had to stop foreigners crossing the border to fill up
Malaysia is to remove controls on fuel prices from August, allowing petrol and diesel prices to rise.
A new price structure will mean that the price at the pump "will depend on global market prices", said cabinet minister Shahrir Abdul Samad.
Malaysia currently has some of the world's cheapest fuel prices, but the subsidies are expected to cost it about $14bn (£7bn) this year.
There will be different measures to subsidise those on lower incomes.
Cash handouts and fuel quotas are among the measures being considered.
Full details of the new system will be released on Wednesday.
Petrol currently costs 1.92 ringgit (59 US cents; 30 pence) per litre, which is less than half the price in neighbouring Singapore.
Malaysia is a net exporter of oil and so has been gaining from rising fuel prices, but the subsidy on pump prices has still been a big drain on its treasury.
Prime Minister Abdullah Ahmad Badawi has called for drastic measures to ensure food and fuel security, including banning oil speculation.
"The international community must be prepared to consider bold and unprecedented measures," he said.
He suggested one option might be to suspend trading of oil on futures markets.