From Desert Operations Wiki
Oil is produced in the Oil Refinery. There you can convert the Diesel and Kerosene. These resources are required for the Units, when you attack another player. How much the Units will need you can find it here: Units.
In the beginning you will not need Oil, Diesel and Kerosene, but later it will be an important resource and it is always scarce and demanded. You should early in the Game build many Oil refineries. An excess of Oil can easily be sold in the Trade.