Germany cuts fuel tax as Middle East conflicts push prices higher

Germany's government announced Friday that it will cut the tax on petrol and diesel by 17 cents per liter starting next month, as part of a relief package worth €2.5 billion. Chancellor Friedrich Merz said people who depend on their cars daily are reaching their financial limits, and that the package represents a significant sum given the country's strained budget.

The tax cut was agreed between Germany's federal and state governments and forms part of a broader package Merz had promised as fuel prices kept climbing. The increase has been driven by the war in Iran and the escalating conflict between Yemen's Iran-backed Houthis and Saudi Arabia. Two weeks ago, a key oil benchmark topped $100 a barrel for the first time since July following the latest Middle East escalation, pushing pump prices higher across Europe.

Price cap also planned

The Merz government intends to introduce a temporary cap on petrol and diesel prices, modeled on schemes already used in Luxembourg and Belgium. The cap would factor in oil market price movements, transport and distribution costs, and retailers' profit margins. Berlin is targeting Jan. 1, 2027 for its introduction.

Windfall tax debate

German Finance Minister Lars Klingbeil is among those in the EU pushing for a bloc-wide windfall tax on oil companies that have earned large excess profits since the war began. The issue features prominently at an informal meeting of EU finance ministers taking place in Dublin on Friday and Saturday. Klingbeil has urged the European Commission to present a proposal by the end of October, saying several member states have long called for such a model and that the public can see oil companies exploiting the situation by raising prices and profits.

Merz's conservative allies have pushed back, however. Economic Affairs and Energy Minister Katherina Reiche has argued a windfall tax would only be justified in cases of abusive price increases, noting that Germany's eleven domestic refineries reduce its dependence on foreign supply—an advantage she said must not be put at risk.