Moisture contamination is one of the most obvious causes of deterioration in the insulating quality of transformer oil. This contamination can be eliminated by purification. A less rapid, but more serious characteristic deterioration is the formation of acids and sludge, which is caused by oxidation. Thus the exclusion of oxygen is of prime importance. In open-breather transformers, the oxygen supply is almost unlimited and oxidative deterioration is much faster than in sealed transformers.

Atmospheric oxygen is not the only source of oxygen available for the oxidation of insulating oil; water also serves as a carrier of oxygen and leaky gaskets constitute a real hazard, causing both oxidation and moisture contamination. The rate of oxidation also depends on the temperature of the oil; the higher the temperature, and the faster the oxidative breakdown. This points to the importance of avoiding overloading of transformers, especially in summer time. Oxidation results in the formation of acids in the insulating oil which in turn, contributes to the formation of sludge.