Oil is an important component of most transformers. Oil serves to dissipate the heat generated in the core. It also serves to provide dielectric isolation between the windings and the transformer body. Transformer oils need to be stable at high temperatures with excellent dielectric properties.
Traditionally, mineral oils have been used in transformers. The downside of mineral oil is that they are easily combustible causing transformer fires. Polychlorinated Biphenyls, a synthetic compound was used as a replacement for mineral oil as it is not inflammable. However, it is highly toxic and carcinogenic, not biodegradable and can cause damage to the environment if leaked. The use of PCBs is now banned in many countries.
Research has led to the development of many types of transformer oil which are fire-resistant and non-polluting. Some of these oils are based on esters which are naturally available in vegetable oil or on synthetic esters. These oils though expensive are environment-friendly, fire resistant and have the require dielectric properties. Their high cost is offset by the elimination of the need for building expensive vaults for the transformer to contain any fire.