Crude Oil generates between y-levels 20 and 30 in small pockets of about 12 blocks.
Oil can be extracted using a Portable Oil Extractor. Once, extracted oil can be refined into Rocket Fuel in the Refinery.
Oil from other mods can be used in the refinery, using buckets or by piping it into the sides.
Oil generation can be disabled in the config, but if you don't have another mod that adds oil you will not be able to produce fuel.
Collecting the oil is a bit difficult in the current version. Once an oil source is found you need to have two things with you, a Portable Oil Extractor and an Empty Liquid Canister. Stand within a source block of oil and hold the Right mouse button; an extracting animation will play in the form of small black pixels moving up the shaft of the extractor. The animation will play until you release the mouse button, although the block of oil is used almost instantly. Unfortunately, the oil block isn't destroyed but simply lowered by about 1/3 and right-clicking in the same source block will not get more oil, leaving some confusion of how much oil is actually there. Once the oil canister is full, you can use a Refinery and some coal or other vanilla combustible to turn the oil canister into a fuel canister, which can then be used in the Spaceship.