Oil-filled capacitors are generally high power and/or high voltage. They are often of the wound film capacitor variety and their size is usually fairly large because of the energy they can store.
The oil in the capacitor has more than one purpose. Firstly, it is used to remove any air voids and secondly it helps to cool or remove the heat away from the capacitor windings. These windings tend to generate an excessive amount of heat when they reach their discharge capacity. The oil works to offset these higher temperatures so that the capacitor can remain working optimally.
For metalized film capacitors, the oil has another benefit, in that it helps prevent arcing from between the two plates. If, however, arcing were to occur the oil would reseal the hole caused by the arcing. This is why, even though oil-filled metalized film capacitors are not a very common application, these type capacitors are often referred to as self healing capacitors.
The type of oil used is not what one would find in a automobile engine or the lawn mower sitting in the garage. Arizona Capacitors, Inc., for example, uses a mineral oil in most cases, but a silicon oil may be used as well. Both of these oils are chosen because they are non-hazardous to people and the environment, but the mineral oil is the most economical of the two.
Prior to the mid 1970’s some of the oil-filled capacitors contained PCBs (polychlorinated biphenyls). These were desirable because of their stability and low flammability. The United States Congress banned all domestic production of PCB material in 1979.