How oil price hikes threaten Germany's economy

How high will the Iran war drive up the prices of oil, gasoline and diesel?

There is great concern that the price shock could dash hopes for economic recovery in Germany.

"The most important news first: Germany's energy supply is secure," German Economy Minister Katherina Reiche said on Wednesday.

Although prices rose quickly by around 30% in the wake of the US-Israel war with Iran , there is sufficient oil available, she insisted, and there is no cause for concern regarding gas supplies in Germany.

"Our dependence on the Gulf region for gas is very low, accounting for less than 4% of total EU consumption," Reiche added.

The German government's top priority in the past few days has been to convey stability.

It reacted immediately after the International Energy Agency (IEA) asked its member states to release 400 million barrels from their national oil reserves to stabilize oil prices.

That's the equivalent of over 54 million tons, and the largest release in the history of the IEA.

The IEA requires its 32 member states to maintain reserves equivalent to their average 90-day oil import volume.

32 countries to release record oil reserves as prices surge
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Oil storage in secret locations
According to its Economy and Energy Ministry, Germany holds 19.5 million tons (143 million barrels) of crude oil in secret storage locations.

Most of it is underground in large caverns, but some reserves are also located above ground in tanks.

Germany intends to release 2.4 million barrels of this reserve.

Furthermore, the German government plans to restrict price hikes at gas stations.

Gasoline and diesel prices are currently well over €2 ($2.3) per liter, and each day the price goes up and down considerably at individual gas stations.

Now, to alleviate the burden on commuters and businesses, Reiche wants to follow Austria's example and permit gas stations to raise prices only once a day.

Price reductions, however, would be allowed at any time.

The German government is also considering tightening the antitrust law and giving the Federal Cartel Office, which monitors price-fixing and price increases, more powers to intervene.

Just over 100 million barrels of oil are produced worldwide every day.

One fifth of this is shipped through the Persian Gulf.

But since the attack by the US and Israel, Iran has stopped ships from passing through the Strait of Hormuz .

Utilizing oil reserves in this situation is "sensible, but not a remedy for all difficulties," said economist Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin.

According to his calculation, the 400 million barrels released now can compensate for the blockade for just under three weeks.

But should the conflict escalate further and the strait remain closed, the oil reserves would be no more than "a drop in the ocean."
Shipping in limbo as Strait of Hormuz crisis deepens
Since Russia's full-fledged invasion of Ukraine , Germany has cut almost all Russian gas supplies, causing energy prices to rise.

They are now far too high, according to the business community, which now sees itself at a significant disadvantage in international competition.

Industrial production is declining steadily in Germany and companies have increasingly been moving their investments to other countries.

When the new federal government under Chancellor Friedrich Merz took office 10 months ago, it declared that its top priority would be achieve an economic upswing.

But a real recovery has yet to materialize.

Aside from the high energy prices, businesses are complaining about excessive bureaucracy and regulations.

US President Donald Trump 's unpredictable tariff policy has added to the burden of Germany's traditionally strong export sector.

The German government has initiated massive public spending to modernize the armed forces and to renovate and build new infrastructure.

Will the Iran war now derail this plan?

Economists are divided on this issue.

The DIW has forecast that the economy could still grow by 1% this year.

However, there's a significant caveat: That prognosis assumes that the strongest surge in energy prices is already over and that oil and gas prices will subside in the second quarter of the year.

Other economists are less optimistic.

"If the global economy were to permanently lack 20% of its oil and gas capacity, that would be severe," economist Gabriel Felbermayr told the Handelsblatt newspaper.

That would be the worst-case scenario.

For every $10 the price of a barrel of oil increases, growth in industrialized nations would be reduced by 10%, according to the head of the Kiel Institute for the World Economy .

The German Economic Institute (IW) has run a simulation in which higher oil prices could cause tens of billions of euros in damage in Germany.

If the price of oil were to climb to $100 per barrel (159 liters), the losses in gross domestic product would amount to 0.3% this year and 0.6% in 2027.

Europe's massive defense gamble
Merz worries about industries, exports, refugees
This is not reassuring news for the German government.

Much will depend on how long the conflict in the Middle East lasts.

"Germany and Europe have no interest in an endless war," said Merz.

"We have no interest in the dissolution of Iran's territorial integrity, statehood, or economic viability." He added that this would harm everyone.

"It affects our security, our energy supply, and potentially also the situation on migration."
Energy-intensive industries such as chemicals, steel, mechanical engineering and transportation are particularly burdened by expensive oil.

Disrupted air and sea traffic is leading to longer transport times and higher costs.

In the automotive industry , the price increases are hitting a sector already in crisis.

The Volkswagen Group plans to cut around 50,000 jobs in Germany by 2030.

Porsche has just reported a profit slump of over 91%.

Only manufacturers of military equipment are reporting good figures.

The Düsseldorf-based arms manufacturer Rheinmetall reports a further boost in numbers: Demand for anti-aircraft guns has risen sharply, CEO Armin Papperger said at the presentation of the company's financial results.

This article was originally written in German.