It is generally believed that crude oil is formed from the action of intense pressure and heat on buried dead remains of zooplankton and algae in the earth's crust over hundreds of millions of years.
Over time the decayed residue gets covered in mud and silt, sinking further down into the earth's crust. It is preserved there in hot and pressured layers, gradually transforming into oil reservoirs.
The picture of crude oil below was gotten from petroleumgeology.org
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