I think it's a little more than just the "divine right of the Pope" and a form of Papal arrogance. I also think that the German Reformation was more than a grudge match between Luther and Leo X. The received western Christian wisdom of "what happens at Mass", as codified in Scholasticism, defines the Mass as the "unbloody representation of Calvary". When Luther attacked the Roman Canon, the consecration of Mass, he annulled the idea that a priest can "effect" the Sacrament, i.e. the Mass is a work of a person. Rather, the Lutheran pastor is powerless to effect anything -- he merely recounts the scriptural narrative that brings grace to the people through faith in God in the Eucharist. For Luther the Eucharist was not ex opere operato as it is in Catholicism, where the Host remains the crucified Christ forever after consecration regardless of what a person believes or not.
Luther's concept of the liturgical action must have been as incomprehensible to Roman prelates as the Flat Earth Society is to our modern ears. Centuries of philosophy couldn't prepare them for this cataclysmic change. So the condemnations hurled by the Pope may have been arrogant, but were also probably a result of the seismic shock that followed Luther's bold assertions.
For a start I think you're confusing the Priesthood of All Believers with Consubstantiation, but that's only a minor thing.
I'm not sure I can entirely agree. I mean, of course it wasn't "just a grudge match" between Luther and Leo, for a start because to Leo Luther was just another monk. There couldn't be a clash of wills because Luther simply couldn't be regarded as Leo's equal. If anything it was more a situation of the stubborn radical and the leader of the pack, one annoyed that the other wouldn't listen to him, the other irritated by "an upstart priest". (I actually have a feeling I've read that before so that can go down as a Leo quote

). But both had to be intractable on their positions. As I've said, Leo literally couldn't agree to a Council on the matter as he and most of the Catholic Church viewed it as almost a heresy in itself. Papal Councils were detested by many Catholics, and on the few occasions (and there were a number down the years) when priests had requested Councils, their careers could easily be ruined for making the simple comment. It didn't help that several historical Councils had reputations for causing more problems than they solved. As for Luther's part, any step down from his initial demands could easily compromise his reputation as a reformer among the few who supported reform, and since he had gone on record as calling Leo "the Anti-Christ" he wasn't exactly in a great position for changing his tack.
Also, I think you're being a bit naive saying that Luther's belief in consubstantiation was as alien as the idea that the world is flat. There had been repeated "heretics" down the years who virtually all attested to this as one of the issues they had truck with, so obviously the idea wasn't a universal belief - and these were reformers who gathered tens, sometimes even hundreds of thousands of supporters until their movements were crushed, so they are hardly idle individuals. And remember that much of the Bible, particularly sections pertaining to Jesus, were full of metaphors. Jesus spent much of His ministry using words to convey points through analogies, stories, arguments and the like, and though the laity were positively discouraged from reading the scriptures, monks were supposed to have extremely detailed and advanced knowledge of it - and Luther certainly did. While it's one thing having an official Church line on a certain take, it's another to believe that everyone who adheres to your standards will therefore read the Bible and understand everything the same way that you did. In fact, while it wasn't nearly as prevalent and encouraged as in Judaism, debate among monks was an established and common thing on scriptural matters. When Luther pinned his 95 Theses on the door of Wittenburg Cathedral, he wasn't remonstrating, he was doing the official standard action for a monk who wished to invite other Churchmen to a debate - it's just that his statements were so adamant and far-reaching that they went straight to the top. While the Church line may have been near unchallengeable on issues like these, I think it would be very unwise to suggest even that the average monk hadn't heard this very issue debated between monks he may even have known.