油 is a clever double (triple?) entendre here. Yes it directly translated to oil and 石油 (crude oil) has the same pronunciation as 食油 (food oil).

But 油 also has the same pronunciation as 铀 (uranium). That is why he was talking about 炼油(refining oil/uranium) 来 (to) 炸 (fry/bomb) 鱿鱼 (the squid).