President Trump announced that America First Refining will build a 168,000-barrel-per-day refinery in Brownsville, Texas, a deep-water port with direct rail and sea access, supported by investment from India’s Reliance Industries. The facility — the first new major U.S. refinery project in roughly 50 years — will operate on light shale oil and help reduce the U.S. trade deficit with India by $300 billion. Many Gulf Coast refineries are unable to process light, sweet oil from fracking shale fields because they were configured in the last 40 years to run on lower-cost heavy, sour oil, which has higher density and has been readily available from Canada, Venezuela, and Mexico. U.S. light oil resources were on the decline before hydraulic fracking and directional drilling brought an explosion in production. America First plans to break ground on the refinery in the second quarter of this year.
According to CNBC, the refinery will process 1.2 billion barrels of U.S. light shale oil and produce 50 billion gallons of refined products. According to Trey Griggs, president of America First Refining, “The United States has a surplus of light shale oil but a shortage of refining capacity designed to process it. By building this refinery at the Port of Brownsville, we’re unlocking a major expansion of American energy production while creating thousands of high-paying jobs and strengthening our domestic supply chain.” Unlike many existing U.S. refineries that rely on heavy oil from Venezuela, Canada, and Mexico, this facility does not require imported oil, thereby strengthening U.S. national and economic security.
Reliance owns the world’s largest oil refinery, a 1.4 million barrel-per-day refining complex, in Jamnagar, India, and has a market capitalization of $206 billion. The firm, which reported $125 billion in revenue last year, also operates businesses in retail, new energy, digital services, media, and entertainment. Reliance has signed “a binding 20-year offtake term sheet” with America First, and will buy the products that the refinery produces. According to Reuters, the cost of constructing refineries or adding capacity in the past decade has averaged about $40,000 per barrel of capacity, or about $6.7 billion for 168,000 barrels.
The last major refinery built in the U.S. was located in Garyville, Louisiana, in 1976. According to the Energy Information Administration, U.S. refining capacity is currently at 18 million barrels per day, and operational utilization is around 90%. While Texas is adding refining capacity, California is permanently shuttering its refining facilities with two recent departures.
Forty years ago, California had 42 refineries. After the closure of the Valero refinery in Northern California, it will have eleven. The exodus of refineries is forcing California to turn to imports. It is even importing gasoline from the U.S. Gulf Coast refineries, sending ships to the Bahamas first to avoid the higher costs of the Jones Act.
The reason for the exodus of refineries from California is its policies and regulations that drive fuel prices above the national average. California’s combined taxes add about $1.00 per gallon, with $0.18 from a federal gasoline tax, $0.709 from a state gasoline tax, $0.10 from a sales tax, and $0.02 from a storage tank fee. California also imposes several “hidden taxes” that directly affect the price of gas. These hidden taxes take the form of environmental compliance costs, which add an estimated $0.54 per gallon from California’s Low Carbon Fuel Standard and the state’s Cap-and-Invest Program, formerly called Cap-and-Trade.
The conflict with Iran has increased oil prices, which in turn has increased the national average and California’s gasoline prices. According to AAA, as of April 7, the national average gasoline price is $4.14 per gallon, and California’s average price is $5.93.
Analysis
Since a new domestic refinery was built in 1976, the U.S. has become a net exporter of energy products and the world’s largest producer of oil and natural gas. As we’ve explained previously, “The lack of refining capacity for our domestic production stems from U.S. policy that has blocked the development of new refineries for decades through adverse environmental standards and regulatory uncertainty.” The Brownsville refinery will redirect up to 60 million barrels of American oil annually back into American refining, creating thousands of both construction and permanent refining jobs, and producing gasoline, diesel, and jet fuel from an entirely domestic supply chain.
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