Oil and gas price spikes from Iran war reignite debate over cost relief in Germany

Rapidly rising oil and gas prices as a result of the US-Israeli attack on Iran have ignited a new debate about energy price subsidies in Germany. Petrol and diesel prices in the country rose above the threshold of two euros per litre for the first time since 2022, creating pressure on the government to protect consumers.

Some politicians, including Saxony-Anhalt’s premier Sven Schulze, a member of chancellor Friedrich Merz’s conservative Christian Democrats (CDU), and parts of the pro-business Free Democrats (FDP), called for cost relief measures such as a fuel tax break. This measure, often dubbed the “fuel price brake”, was introduced by the previous government for three months following Russia's invasion of Ukraine war when energy prices also skyrocketed. 

But leading economists warned against such a step, saying it would reduce incentives to lower consumption and increase public debt that would eventually have to be repaid. Marcel Fratzscher, president of the German Institute for Economic Research (DIW), said "a fuel rebate to cushion higher prices would be an expensive mistake.” Instead, he argued for a windfall tax on oil and gas company profits “to combat possible abuse.” 

Economy minister Katharina Reiche said the government would investigate petrol stations for potential profiteering linked to the price increases. "We will check that no one is taking advantage of the situation," Reiche told Table Media.

Green Party politician Oliver Krischer, transport minister for the state of North Rhine-Westphalia, called for lowering electricity taxes instead. He said such a measure would "provide additional incentives for people to move away from oil and gas and towards electric cars or heating systems powered by renewable electricity."

Many consumers have already started switching to new gas contracts before retail prices are updated to reflect the higher wholesale price of gas, according to price comparison site Verivox. Since the start of the war against Iran on 28 February, demand for new contracts has doubled, Verivox said. At present, average gas prices in new contracts remain lower at 8.4 cents per kilowatt-hour (kWh), than a year ago (10.2 cents per kWh). 

"Prices for new customers are currently stable but are calculated closely in line with the market,” said Thorsten Storck, energy expert at Verivox. “If wholesale prices remain high, we can expect prices for new customers to rise in the coming weeks.” 

After the start of the war on Ukraine, the German government agreed on a relief package worth up to 200 billion euros, mainly designed to lower gas prices, but it ended up spending much less as prices declined.