Why/how did German arms output peak in 1944 when they were running out of oil?
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Germany used around 44 million barrels of oil pre-war (1938). During the war, civilian consumption of oil dropped to minuscule levels, but military consumption increased. How much oil Germany really needed depends on point of view, but they were getting around 36 million barrels of synthetic oil, 13 million barrels from Romania, up to 12 million barrels of domestic crude and several more million barrels from Hungary and other sources on yearly level.
Despite Allied Oil campaign there were no significant fuel shortages until Soviet capture of Romania in August of 1944. Number of Luftwaffe sorties actually slowly increased towards end of the year, as is the number of available planes. German ground forces, both Wehrmacht and Waffen SS, didn't have to postpone operations or abandon vehicles because of lack of fuel. Only after the loss of Romanian oil fields fuel crisis begun to grip in earnest. That doesn't mean that Oil campaign was ineffective, only that effects were not so pronounced until synthetic oil became practically only source of fuel.
Considering all of this, and the fact that German industry mostly used coal, there were no reason to limit arms production. In fact, despite increased arms production, Germans were increasingly outgunned because Allies (including USSR) were producing even more weapons. Theoretically, if Germans were able to somehow increase their output levels, they would have enough strength in the field (and in the sky) to stop losses of both oil fields and synthetic oil plants. Since historically they were unable to do so, they lost fuel sources and whole war .
http://www.airpower.maxwell.af.mil/airchronicles/aureview/1981/jul-aug/becker.htm
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In addition to the other answers, the Nazis made great progress with the production of synthetic oil.
https://en.wikipedia.org/wiki/Synthetic_fuel#History
Indirect coal conversion (where coal is gasified and then converted to synthetic fuels) was also developed in Germany by Franz Fischer and Hans Tropsch in 1923.[14] During World War II, Germany used synthetic oil manufacturing (German: Kohleverflüssigung) to produce substitute (Ersatz) oil products by using the Bergius process (from coal), the Fischer–Tropsch process (water gas), and other methods (Zeitz used the TTH and MTH processes).[17][18]
Upvote:4
German industry was almost completely fuelled by coal, and its transport was mainly coal-fired steam railways, with some steam-powered inland waterways and electrified rail service. Most of the trucks in Germany had been taken by the armed forces at the start of the war, and they got almost all of the oil production (some of which was made from coal). The lack of road vehicles in Germany during the war would be astounding to modern eyes; those that did keep on operating were usually powered by wood gas generators.
German industry was able to keep working until the fall of 1944, when the Allied bomber fleets began to attack railway marshalling yards and synthetic oil plants systematically. Within a few months, the railway systems collapsed, and industry mostly stopped for lack of fuel and materials, or the inability to ship products. The army and air force also had no fuel, and could not use most of their vehicles.
Source: The Collapse of the German War Economy, 1944-1945: Allied Air Power and the German National Railway, Alfred C. Mierzejewski, 2007.
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