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Oil is a dark liquid added by BuildCraft that is found in the Overworld and Mystcraft Ages. Oil can power combustion engines, or can be refined or centrifuged into Fuel or Fuel Cans. Oil is textured like black water. It can be picked up with a bucket or other liquid storage, or various kinds of Pumps.
Oil wells vary in size from small pools to massive geysers. Oil pools are most commonly found in deserts and never in oceans, but geysers can spawn anywhere (including in oceans). Oil geysers begin underground: A tube extends down from the center of the geyser to an empty "bulb" containing most of the oil, usually between layers 20 and 30. The size of the bulb varies with the height of the geyser. If you intend to pump out a ocean oil geyser, it is recommended to build a wall around the geyser. Otherwise the pump will deliver water from the ocean (Newer versions negate this effect and seem to only pump out the oil until its completely gone).
Warning, the following describes the behavior in older versions of BuildCraft and is probably outdated. In some newer versions, at least, the suggested use of placing oil in the nether to "stay safe" results in an instant explosion instead!
Oil acts differently than water and lava. It does not hurt mobs, but players cannot breathe in it. It flows much slower than Water and cannot make infinite sources. It is explosion resistant. Unlike water, oil can be placed in the nether. Like most of the placeable liquid, it will act exactly like water in contact of lava (either turning into stone or turning lava into obsidian/cobble).
Oil also has a very valuable alternative use, of being placeable in the Nether. In the Nether, Oil has similar properties to both Lava and Water. Like Water, Oil can solidify Lava into Obsidian and to extinguish the flames if the Player is caught on fire. However like Lava, Oil flows very slowly; it only flows a few blocks from the source block, and once flowing it takes a very long time to dissipate.
Knowing this, Oil has a myriad of new uses, from solidifying bridges across Lava Lakes, to pushing angry Zombie Pigmen back. It is also hazardous to Blazes, like water is, only it flows slower.