The expansion of the refinery capacity in oil-producing countries is a rising trend. The fact that the majority of oil producers have already begun to vertically integrate into the downstream oil refining segment calls for a detailed examination of the implication of such investments. Oil-producing countries rely largely on the revenues from crude oil exports, while refining crude oil locally means increasing the use of crude oil domestically and/or possibly reducing oil exports. Such a decision can affect oil supply and demand balance and, thus, market stability. Although various factors can influence crude oil prices, the implication of the expansion of refinery capacity has not been explicitly examined in the literature. Therefore, the primary concern of this research is the increase in crude oil consumption in domestic refineries and the implications that can arise from this. Firstly, the expansion of existing refinery capacity or investing in new plants has an impact on crude oil net exports. It can reduce crude oil exports, and thus influence the price of oil depending on the magnitude of an oil producer’s crude oil supply (market power) in the world oil market. Secondly, there are the opportunity costs of not exporting crude oil and refining it locally. This research aims to investigate the decision of petroleum refinery investment in an oil-producing country. We develop a partial equilibrium static model to compare the cost of refining crude oil in a local refinery with the cost of importing refined products. The incorporation of the oil producers’ market power helps in determining the refining decision by evaluating the impact of the export capacity on the oil price in the world market. The results of the empirical test confirm the crude oil price responsiveness to the oil export levels of OPEC member countries and lend support to theories emphasising the existence of the market power in the world oil market. Furthermore, we evaluate the export decision on whether to export crude oil or refined products by assessing the economies of scale in the refinery investment and in the transportation costs of the refined products. The results of the numerical example indicate that petroleum refining exhibits economies of scale while there are diseconomies of scale in the refined products shipping. This means that the refining investment costs can offset the transportation costs, thus making the export of refined products profitable. However, we numerically find the optimal crude oil input capacity at which the oil producer is indifferent between the two export choices. Finally, despite the disparities in the petroleum refining segment in OPEC member countries, there are common challenges facing the industry in OPEC members. These challenges fall into policy-related (intrinsic) challenges and extrinsic challenges. The policy-related challenges mainly comprise: refinery size, refinery configuration, and subsidy. Extrinsic challenges are refinery-specific, such as construction cost, lack of skilled labour, political instability and insecurity. The research finds that large oil producers have ambitions to expand the capacity in their domestic refineries as, from their point of view, it would not just satisfy the domestic demand for refined products but also add value to the supply chain. This particular objective requires a detailed evaluation of the opportunity cost of first, the refining decision, and second, the export decision.