When the US and Israel attacked Iran, the response was not long in coming. Iran is no longer allowing ships to pass through its coastal waters. The Strait of Hormuz, the bottleneck in the Persian Gulf through which 20% of the global oil trade passes every day, is now effectively blocked.

After the attack, the price of oil immediately rose sharply. Prices for gasoline and diesel also skyrocketed at German gas stations. Depending on the region, premium gasoline even went as high €2.50 ($2.89) per liter. The average price for diesel is currently just over €2, which is €0.30 higher than before the attack on Iran.

There were even more extreme price spikes for natural gas following Iran's drone attacks on liquefied natural gas (LNG) facilities in Qatar, resulting in a halt to production. Germany does not source LNG directly from Qatar. Its supply chains are diversified, and much of its gas is sourced via Norwegian pipelines. However, the price is ultimately determined by the European wholesale market, which is driven by the balance between international supply and current and expected demand.

Increased energy prices not only impact households but also industry, resulting in higher production costs. Energy-intensive sectors are particularly affected, such as chemicals, steel, glass and paper, but the automotive and mechanical engineering industries are feeling the effects as well.

Shock for the Merz administration

The war in Iran is reminding Germany just how vulnerable highly industrialized economies are in this era of global crisis. And German economists have expressed similar concerns. Veronika Grimm, one of five experts who advise the German government on economic matters, warns of rising inflation and additional investment uncertainty. "We must prepare ourselves for a prolonged period of increased uncertainty," the professor told the Redaktionsnetzwerk Deutschland (RND).

Alarm bells are ringing in German policy circles. For 10 months now, a coalition between the conservative Christian Democratic Union (CDU)/Christian Social Union (CSU) and the center-left Social Democratic Party (SPD) has been in power. During his election campaign and upon taking office, Chancellor Friedrich Merz (CDU) promised that reviving the German economy would be his top priority. But the upturn has yet to materialize. The small upturn that Germany saw at the beginning of the year could now be undone by the war in Iran.

Poison for the economy

Energy prices in Germany have risen dramatically since Russia's invasion of Ukraine. Further price increases, coupled with faltering supply chains and additional global uncertainty, are proving toxic for the German economy.

Grimm is calling for Europe's energy supply to be made more resilient by diversifying supply chains, stocking up reserves, coordinating European purchasing and accelerating the expansion of its own energy supply. Ever since gas supplies from Russia were cut off four years ago, there have been calls for these measures to be implemented. The only problem is that this has been difficult to implement. After an extremely cold winter in Germany, gas storage facilities are almost empty.

A brake on transport and aviation

In addition to the energy crisis, the war in Iran is causing additional problems, especially for the shipping industry. German shipping companies now have to bypass the Persian Gulf, causing delays in global supply chains and undermining supply chain security.

Insurance premiums for maritime shipping are rising, as are fuel costs. The airspace over the Gulf states is partly closed. Airlines have to reroute their flights over long distances. This not only extends travel times but also increases kerosene costs.

With every day that energy prices rise, there is an increasing risk that inflation will grow once again. This is because companies have to pass on the costs by raising the prices of their products. This has been driving inflation since the energy crisis of 2022, something consumers have certainly noticed.

As the cost of living increases, consumers' purchasing power decreases, which negatively impacts the domestic economy. Conversely, Germany becomes less competitive internationally as its products grow more expensive. This presents another major problem for this export-oriented nation.

How is the German government responding?

Even though the government is aware of the problems, its response has been muted so far. Economics and Energy Minister Katherina Reiche (CDU) has set up a task force to conduct daily analyses of the situation and prepare possible measures. The aim is to monitor price explosions, oversee the security of supply chains and assess the impact this is having on businesses. Her announcement has been met with sarcastic comments on social media.

The fact is that the government is profiting handsomely from high fuel prices. Nearly half of what drivers pay at the pump goes into the state coffers via various taxes. Lobby groups such as the Mobil in Deutschland automobile club have now accused the federal government of "cashing in on motorists."

Much criticism of Germany's energy policy

The federal government is trying to convey a sense of stability amid the crisis. It has pointed to relief measures that have already been put in place to curb energy prices, such as lowering the electricity tax for businesses and abolishing various levies. But critics complain that the Merz government is continuing to promote dependence on fossil fuels rather than reducing it to meet climate targets.

Environmental and consumer associations are critical of the fact that the expansion of renewable energies has stalled. Legislation has slowed down the expansion of wind power and solar projects. Amid global uncertainty, Germany now appears less crisis-proof than should be the case.

This article was originally written in German.

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