Trumpflation: Price Shock at the Gas Pump

Those, for me, are the three dimensions of a sensible policy: a clear stance and a clear line on long-term price development. We have to move in the right direction and cannot be deterred. Truly substantial resource mobilization to cushion short-term hardships and enable the transition. And then, in a sense, political accountability — the question of who the beneficiaries are and how we regulate the economy. Where are the oligopolies that have exploited these price shocks for themselves?

Yes, honestly, this is a controversial topic. It's a very complicated topic, I think. And as you already hinted, Sarah, the question of the cost of living can play out politically in very different ways. That is, in Berlin and New York we've seen electoral movements to the left that were presumably driven by concerns about the cost of living. But it is also clear, I think, that the price shock in America in 2024 contributed to Trump's electoral success. And it is also the case that AfD voters report major inflation concerns and, overall, naturally, name the cost of living and their financial conditions as their main point of concern. So I think there is, in a sense, a common pool of fears and worries. Beyond that, there is the feeling that these concerns are not being answered by the centrist parties of the establishment, of the status quo, and then people look for answers. And I think there is a certain space for the articulation of more or less credible answers. And that includes, I think, a) addressing the topic, b) promising to go big rather than small — that is, to actually do something. And third comes the question of credibility. I think the formula is very complex. What works in New York or in Berlin must be formulated quite differently for a right-wing electoral victory in Saxony-Anhalt or Mecklenburg-Vorpommern. But I think what is important is to plant a flag on a contentious issue — whether it's Gaza in Mamdani's case or, in the AfD's case, the question of migration and racism — to position oneself and thereby establish credibility. And then come the social and economic questions that can be mobilized. So I'm skeptical that inflation or the cost of living per se explain the electoral decision, but they are, in a sense, part of the context for a politics that is searching for radical answers, which can receive answers from both the right and the left.

Yes, that's a really interesting question. Well, we all know that the war against Iran, triggered by Israel and America, has tightened global oil supplies. When people think of oil, they think of gasoline and diesel, but in between lies the entire refining complex. That is, what actually constitutes the petrochemical industry is not just the gushing oil wells, but also the processing. And a lot is happening in this area right now. In a sense, all the action is there. Oil prices, as we know, haven't risen as high as we expected. And that has to do, among other things, with a bottleneck in refining, so refineries aren't buying more oil because they can't process it. But at the other end — that is, on the gasoline and diesel market — this naturally hits even harder, because there is suddenly a real shortage. That changes everything, because freight transport accounts for about 70% of logistics, which we run primarily on diesel — also in America, where diesel for passenger cars is very, very rare. Diesel is also used in agriculture, and that feeds through to food and other consumer goods. On top of that, the elasticity of this demand — a lot of heavy words in German — for gasoline consumption, one might think households would reconsider driving. But in logistics and agriculture, you have to keep the tractor or the truck running, no matter what the prices are. So this is genuinely an important inflation hotspot, and it's estimated that a diesel shock of 20 to 30%, as we're seeing now, can easily account for a price shock of 0.6 to 1% of the inflation indicator. So roughly a third of current inflation could be explained by this fossil-fuel price shock.

Yes, there are two dimensions. One is the historical development of the petrochemical complex over the last ten years. When people think of the Middle East, they immediately think of oil wells — oil coming out of the ground. But what you also have to consider, especially over the last ten to fifteen years, is the rest of the value chain — the refineries, the production of gasoline and diesel. And the major players in the Middle East have invested enormously in this over the past ten years. So what's at stake in the Middle East is not just the oil wells, but the petrochemical complex itself. They are responsible for around 20% of global refinery product production. And this also leads to a crowding-out effect: because the big producers, like Aramco in Saudi Arabia, are investing in the value chain, it no longer pays for the West — Europe and America — to invest in this sector. So over the past 30 years, hardly any refinery complexes, or none at all, have been built in the West. This naturally creates great vulnerability to supply chain disruptions. And it is this complex that is now threatened by Iranian counterattacks. We know this from LNG — we discussed it at the beginning of the war in this podcast. That is, in the highly complex production of gas exports, but it also affects the refining complex for oil, diesel, and gasoline. Beyond that, there is a kind of emergency valve in Saudi Arabia for Saudi oil exports. This concerns the crude — that is, raw oil. There was a pipeline running from the Persian Gulf across the country, providing further connections to the world market. And various actors have now attacked this pipeline. So crude oil exports and refinery production are threatened, and this simply underscores the enormous complexity and scale of this complex. So this is not just about classic oil wells somewhere in the desert, but about an absolutely enormous petrochemical complex that has become, in a sense, a battlefield. And that is the main force behind the tightening of global supply.

First of all, one has to have the utmost respect for Ukraine's success here. I mean, it's incredible that they managed to expand this war — which they were practically forced to fight on their own territory for years — onto Russia itself. And not only that, but in a way that actually produces real strategic effects. For a country fighting against such odds as Ukraine, with such a massive imbalance of forces, this is absolutely incredible. And the counterpart in the Middle East is, of course, the Houthis, who with even fewer resources produce huge effects in their attacks on Saudi Arabia. So we're seeing a radically new form of warfare, where Russia arrives with the classic heavy equipment — ballistic missiles, etc. — and Ukraine manages to strike strategic industrial infrastructure with these means. Simply, respect. The second point is that Trump is, of course, exaggerating, and Trump is absolutely cynical. It is very clear that the question of Russian supply is being overstated threefold by the disruption of diesel supplies from the Gulf — the war for which Trump himself must take responsibility. So this is a fig leaf; these are cynical arguments now being put forward from Washington. You can't take them seriously in this form. But the third aspect is the question of how it's possible that what Ukraine is now doing in Russia has an impact on the global market. One might think of oil and these refineries as relatively regional or even local facilities. I don't know — if you live in certain parts of Germany, you can see refineries. You imagine crude oil being delivered, and then gasoline and diesel being conjured from it, and then you consume it at the gas station. That's true for many markets. But the reason why this question of Russia and the Middle East is so important is that very large shares of the global market are now traded globally. And the conclusion is that, just as with crude oil, there is a global price for diesel — or at least a price that settles globally. So if supplies from Russia are interrupted, that hits the global market, and it doesn't take a huge drop to move this market considerably, because this market normally settles relatively stably, and if something is missing — a margin is missing — that leads to significant price movements.

Yes, it's a current discussion in America, because the diesel price is genuinely remarkably relevant for America. Nobody drives a diesel car, but the entire trucking sector runs on diesel. So the most American thing of all — these big trucks — run on European engines. So that's already a bit strange. This naturally also affects above all American agriculture, which is a huge lobby and is massively overrepresented in the Senate, because Senate seats are simply distributed by state. Every state, I don't know, Iowa or whatever, has two senators. So there's a real dynamic behind this proposal. America could, of course, secure its own supply, decouple itself from this global market where diesel and gasoline are also traded in refined form — really traded, not just crude oil. But the results of that are genuinely complicated and not easily foreseeable. And one has to hope that the Trump administration doesn't once again, in a sense, discover how the system works by breaking it. Because what's interesting about refineries is that their products are produced in fixed proportions. If you take a barrel of crude oil and put it into the refinery, you get 40% gasoline, 30% diesel, and 25% other products. So if we now move to block exports — that's 1.5 million barrels per day — the question arises: where will American diesel producers store this stuff? Once the storage is full, they have to stop diesel production. But you can't stop diesel production without stopping the production of the remaining 55 to 60% of refinery processes. So the result of a storage bottleneck for diesel would be that America's entire refining complex would slow down, and that would lead to a bottleneck in the supply of gasoline and probably other petrochemical products, and would presumably drive their prices up. So market economies and divisions of labor are genuinely complex weavings with inherent, deeply rooted technological and market-driven logics. And if you just quickly decide, okay, we're going to step in here and block things first, it's not just the Hayekians and the neoliberals saying, "People, look, a lot could go wrong." It's also the engineers in Texas, in the Gulf of Mexico, who will suddenly report to Washington: "Sir, if we don't want to produce diesel anymore, you understand, then we can't produce gasoline either." That will be the problem.

I mean, the one thing I wanted to get at is that an intervention in diesel disturbs gasoline, and then gasoline consumers suffer — not diesel consumers. But then there's this other, more structural point you raised, Sarah, and which we've also discussed in the podcast: that America, as a massive consumer and a massive producer, has internalized the conflict between the two sides. That is, you can't simultaneously pursue a policy in America that offers consumers the cheapest fuel and, at the same time, offer producers in Texas or elsewhere the very best profits. That's not an equation that works. And we see this again and again when Trump says, for example, I don't know, I'm going to invade Venezuela and get the oil for America. That's not in the interest of the shale producers. It may well be that it benefits consumers if the refining problems are solved and everything else — we've discussed that before. But this structural conflict keeps arising. It's basically easier for Europeans, because Europe is a massive net importer. There, these conflicts can be resolved relatively easily. One should pursue a policy in the interest of consumers, above all, of course, the energy transition. But for America, there is a genuine structural conflict, and Trump just can't get it right. He just wanders back and forth in his thinking between the idea that it should be cheap and the idea that one should squeeze out the biggest possible profit, and he just can't get it together.