Holy oil is a rare substance. Castiel obtains some from Jerusalem, in order to use it to restrain Raphael. When the oil is ignited, its flames will trap angels and archangels, if an angel touches or attempts to pass through the flames they will die.
Sam describes it as "a devil's trap for angels" but it differs because angels can still use some of their powers while trapped within the flames. Sam and Dean keep bottles of the oil in the trunk of the Impala, each of which was presumably supplied by Castiel.
Holy fire is capable of hurting, though not killing demons. Castiel throws Meg onto a ring of holy fire to escape and Sam douses Abaddon in holy oil and sets her on fire. Both are not killed, but Abaddon is left in so much pain she abandons her meatsuit and flees.