Energy bottleneck in Middle East is damaging German economy

High energy costs, surging prices, and supply chain disruptions are undermining economic expansion. The German government is deeply concerned about developments in the Middle East. Following the US and Israel’s strike on Iran, Iran swiftly retaliated by restricting access to its coastal waters. This has effectively shut down the Strait of Hormuz, a critical chokepoint in the Persian Gulf where 20% of the world’s oil trade flows daily. The immediate aftermath saw a sharp spike in oil prices, which in turn drove up the cost of gasoline and diesel at German gas stations.

Regional disparities are evident in premium gasoline prices, which have reached as high as €2.50 per liter. The average diesel price currently stands just over €2, marking an increase of €0.30 compared to pre-attack levels. The situation worsened with natural gas price surges following Iran’s drone strikes on liquefied natural gas (LNG) infrastructure in Qatar. Although Germany does not directly import LNG from Qatar, its reliance on the European wholesale market—shaped by global supply dynamics and demand forecasts—has led to higher costs.

Industry and Consumer Impact

Escalating energy prices are affecting both households and businesses. Production expenses have climbed, particularly in energy-intensive sectors like chemicals, steel, and paper. The automotive and mechanical engineering industries are also feeling the strain. As inflation persists, consumers face shrinking purchasing power, which weakens domestic economic activity. Meanwhile, rising costs are eroding Germany’s competitiveness in global markets.

“We must prepare ourselves for a prolonged period of increased uncertainty,” said Professor Veronika Grimm, one of five advisors to the German government on economic policy.

German policy makers are sounding alarms over the crisis. A coalition government formed by the conservative Christian Democratic Union (CDU) and Christian Social Union (CSU), alongside the center-left Social Democratic Party (SPD), has struggled to deliver economic recovery. Chancellor Friedrich Merz, who pledged to revitalize the economy during his campaign, has yet to see tangible results. The initial growth seen at the start of the year could be reversed by the ongoing conflict in the Middle East.

Energy prices have skyrocketed since Russia’s invasion of Ukraine. Continued price hikes, combined with supply chain instability and heightened global uncertainty, are straining the German economy. Experts like Grimm argue that diversifying energy sources, bolstering reserves, and streamlining European energy procurement are essential to mitigate risks. These measures have been advocated for years but remain challenging to implement. After a harsh winter depleted gas storage, the situation has become more precarious.

The crisis also disrupts the shipping sector. German carriers must reroute through alternative paths, causing delays and reducing supply chain reliability. Maritime insurance costs are climbing, alongside fuel expenses. Airspace closures in Gulf states have forced airlines to take longer routes, increasing kerosene costs and extending travel times. With energy prices rising daily, the threat of renewed inflation looms large, driven by companies passing on higher costs to consumers.