Three conditions must be present for oil reservoirs to form: a source rock rich in organic material buried deep enough for subterranean heat to cook it into oil; a porous and permeable reservoir rock for it to accumulate in; and a cap rock (seal) or other mechanism that prevents it from escaping to the surface. Within these reservoirs, fluids will typically organize themselves like a three-layer cake with a layer of water below the oil layer and a layer of gas above it, although the different layers vary in size between reservoirs.

The vast majority of oil that has been produced by the earth has long ago escaped to the surface and been biodegraded by oil-eating bacteria. Oil companies are looking for the small fraction that has been trapped by this rare combination of circumstances. Oil sands are reservoirs of partially biodegraded oil still in the process of escaping, but contain so much migrating oil that, although most of it has escaped, vast amounts are still present—more than can be found in conventional oil reservoirs. On the other hand, oil shales are source rocks that have never been buried deep enough to convert their trapped kerogen into oil.

The reactions that produce oil and natural gas are often modeled as first order breakdown reactions, where kerogen is broken down to oil and natural gas by a set of parallel reactions, and oil eventually breaks down to natural gas by another set of reactions. The first set was originally patented in 1694 under British Crown Patent No. 330 covering, "a way to extract and make great quantityes of pitch, tarr, and oyle out of a sort of stone."

The latter set is regularly used in petrochemical plants and oil refineries.

The idea of abiogenic petroleum origin was championed in the Western world by astronomer Thomas Gold based on thoughts from Russia, mainly on studies of Nikolai Kudryavtsev in the 1800s. Gold's hypothesis was that hydrocarbons of purely inorganic origin exist in the planet Earth. Since most petroleum hydrocarbons are less dense than aqueous pore fluids, Gold proposed that they migrate upward into oil reservoirs through deep fracture networks. Although biomarkers are found in petroleum that most petroleum geologists interpret as indicating biological origin, Gold proposed that Thermophilic, rock-dwelling microbial life-forms are responsible for their presence.

The petroleum industry generally classifies crude oil by the geographic location it is produced in (e.g. West Texas, Brent, or Oman), its API gravity (an oil industry measure of density), and by its sulfur content. Crude oil may be considered light if it has low density or heavy if it has high density; and it may be referred to as sweet if it contains relatively little sulfur or sour if it contains substantial amounts of sulfur.

The geographic location is important because it affects transportation costs to the refinery. Light crude oil is more desirable than heavy oil since it produces a higher yield of gasoline, while sweet oil commands a higher price than sour oil because it has fewer environmental problems and requires less refining to meet sulfur standards imposed on fuels in consuming countries. Each crude oil has unique molecular characteristics which are understood by the use of crude oil assay analysis in petroleum laboratories.

Extraction of petroleum

The most common method of obtaining petroleum is extracting it from oil wells found in oil fields. With improved technologies and higher demand for hydrocarbons various methods are applied in petroleum exploration and development to optimize the recovery of oil and gas (Enhanced Oil Recovery, EOR). Primary recovery methods are used to extract oil that is brought to the surface by underground pressure, and can generally recover about 20% of the oil present.

The natural pressure can come from several different sources; where it is provided by an underlying water layer it is called a water drive reservoir and where it is from the gas cap above it is called gas drive. After the reservoir pressure has depleted to the point that the oil is no longer brought to the surface, secondary recovery methods draw another 5 to 10% of the oil in the well to the surface.

In a water drive oil field, water can be injected into the water layer below the oil, and in a gas drive field it can be injected into the gas cap above to repressurize the reservoir. Finally, when secondary oil recovery methods are no longer viable, tertiary recovery methods reduce the viscosity of the oil in order to bring more to the surface. These may involve the injection of heat, vapor, surfactants, solvents, or miscible gases as in carbon dioxide flooding.

It is also possible to chemically transform methane or coal into the various hydrocarbons found in oil. The best-known such method is the Fischer-Tropsch process. It was a concept pioneered during the 1920s in Germany to extract oil from coal and became central to Nazi Germany's war efforts when imports of petroleum were restricted due to war. It was known as Ersatz (English:"substitute ") oil, and accounted for nearly half the total oil used in WWII by Germany. However, the process was used only as a last resort as naturally occurring oil was much cheaper. As crude oil prices increase, the cost of coal to oil conversion becomes comparatively cheaper. The method involves converting high ash coal into synthetic oil in a multi-stage process.

During the oil price increases since 2003, alternatives methods of producing oil gained importance. The most widely known alternatives involve extracting oil from sources such as oil shale or tar sands. These resources exist in large quantities; however, extracting the oil at low cost without excessively harming the environment remains a challenge.

Bunker fuel is technically any type of fuel oil used aboard ships. It gets its name from the containers (known as Bunker Tanks) on ships and in ports that it is stored in, called bunkers. The Australian Customs and the Australian Tax Office defines a bunker fuel as the fuel that powers the engine of a ship or aircraft. Bunker A is No. 2 fuel oil, bunker B is No. 4 or No. 5 and bunker C is No. 6. Since No. 6 is the most common, "bunker fuel" is often used as a synonym for No. 6. No. 5 fuel oil is also called navy special fuel oil or just navy special, No. 6 or 5 are also called furnace fuel oil (FFO); the high viscosity requires heating, usually by a reticulated low pressure steam system, before the oil can be pumped from a bunker tank. In the context of shipping, the labelling of bunkers as previously described is rarely used in modern practice.