Transformer oil or insulating oil is usually a highly-refined mineral oil that is stable at high temperatures and has excellent electrical insulating properties. It is used in oil-filled transformers, some types of high voltage capacitors, fluorescent lamp ballasts, and some types of high voltage switches and circuit breakers. Its functions are to insulate, suppress corona and arcing, and to serve as a coolant.

The oil helps cool the transformer. Because it also provides part of the electrical insulation between internal live parts, transformer oil must remain stable at high temperatures for an extended period. To improve cooling of large power transformers, the oil-filled tank may have external radiators through which the oil circulates by natural convection. Very large or high-power transformers (with capacities of thousands of kVA) may also have cooling fans, oil pumps, and even oil-to-water heat exchangers.

Large, high voltage transformers undergo prolonged drying processes, using electrical self-heating, the application of a vacuum, or both to ensure that the transformer is completely free of water vapor before the cooling oil is introduced. This helps prevent corona formation and subsequent electrical breakdown under load.

Oil filled transformers with a conservator (an oil tank above the transformer) may have a gas detector relay (Buchholz relay). These safety devices detect the build up of gas inside the transformer due to corona discharge, overheating, or an internal electric arc. On a slow accumulation of gas, or rapid pressure rise, these devices can trip a protective circuit breaker to remove power from the transformer. Transformers without conservators are usually equipped with sudden pressure relays, which perform a similar function as the Buchholz relay.

Transformer oils are subject to electrical and mechanical stresses while a transformer is in operation. In addition there is contamination caused by chemical interactions with windings and other solid insulation, catalyzed by high operating temperature. As a result the original chemical properties of transformer oil changes gradually, rendering it ineffective for its intended purpose after many years. Hence this oil has to be periodically tested to ascertain its basic electrical properties, make sure it is suitable for further use, and ascertain the need for .