The Russian war of aggression in Ukraine has pushed up oil prices and thus fuel prices since March. In addition, petrol and diesel prices have even decoupled from the price of oil in recent weeks: no matter how the price of oil has developed, refueling has remained expensive.

This increase in price is becoming an almost existential problem, especially for poorer commuters. Politicians therefore had to react quickly and chose the most obvious, but unfortunately also the worst instrument: the tank discount.

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The fuel rebate, valid for three months from today, is a tax reduction of 30 cents per liter of petrol and 14 cents per liter of diesel. Even if prices initially fell on Wednesday, it is unlikely that this discount will be passed on to consumers in full and permanently.

Because this hope could be destroyed by oil prices. The oil embargo recently decided by the EU is likely to cause oil prices to rise again and thus reduce the effect of the tank rebate or even eat it up completely. In any case, this tax cut is only partially passed on to consumers anyway, as the refiners keep some of this cost cut as an extra profit margin.

This is not malicious behavior but the normal result of a market concentration like the one we have in Germany. Most of the twelve refineries in Germany are owned by the mineral oil companies. This constellation gives the refiners the market power to set prices. This in turn leads to an incomplete transfer of cost reductions.

It is even possible to estimate very well how the tank discount will be passed on proportionately. Using the example of the VAT reduction introduced in 2020 due to the Corona crisis, Felix Montag, Alina Sagimuldina and Monika Schnitzer from the Ludwig Maximilian University in Munich recently analyzed how much of this reduction – which looks very similar to today’s tank discount – started back then was passed on to consumers at the petrol stations: on average only two thirds.

In addition, they showed that the transmission was different for the different fuels. In the case of petrol E5, only a third was passed on, which means that of a 10 cent tax reduction, only 3.4 cents reached consumers. The remaining two-thirds ended up as profits for refineries and mineral oil companies. With the E10, the transmission was at least 50 percent and with diesel even 80 percent. It is likely that the same will now happen with the tank discount.

To ensure that at least this part of the tank discount is passed on, it is also very welcome that the Bundeskartellamt is closely examining developments on the market – along the entire value chain. This has been done since the beginning of the war. While the petrol station market can be observed very well thanks to the so-called Markttransparenzstelle – a platform introduced in 2013 that records the fuel prices of all petrol stations in Germany in real time – it is much more difficult to scrutinize the pricing behavior of oil companies and refineries.

But this is exactly where the problem lies, since market power is particularly pronounced here. Fortunately, the Bundeskartellamt has therefore launched an ad hoc sector investigation at the refinery and wholesale level in recent weeks. This should help to create transparency for the public and politicians.

However, the Bundeskartellamt cannot do much more than “ask the oil companies and refineries uncomfortable questions”, as the President of the Cartel Office, Andreas Mundt, admits. Whether that works remains to be seen. Only if the office recognizes possible abuse or price fixing on the part of the oil companies and refineries could it initiate proceedings and impose fines.

However, since fuel suppliers are fundamentally free to set their prices and given the very volatile oil prices it is difficult to measure and check whether this is passed on, such a step is not necessarily to be expected. Why should the refineries commit illegal abuses when they can substantially increase their margins even with normal market behavior?

The conclusion of the tank rebate is sobering for three reasons: The chosen route of tax reduction will cost the public purse dearly – an estimated 3.15 billion euros – but will not reach those who need it most, namely the poorer income groups, who depend on the car.

First, a good third of that money is likely to end up in the pockets of the oil majors, which need little help right now. Secondly, the social effect of the fuel discount is devastating, because the fuel discount relieves more of the burden on wealthy households that drive a lot in large, fuel-guzzling cars and less on low-wage carers with their small cars. The fuel discount therefore acts like a redistribution from bottom to top, exactly the opposite of what we need and want right now. Third, the fuel discount sends the absolute wrong signal during a climate crisis. People should drive less cars and use less fuel instead of more.

Even if the dramatic situation requires quick action from politicians, the easiest and quickest way is almost never the best – not in this case either. Actually, we should by now be so experienced in crises that the federal government should not only be dependent on ad hoc measures, but should at least then be able to assess the correct distribution and steering effects. Other instruments, such as direct transfers and targeted tax breaks for poorer and needier households, would have been cheaper and more effective.