This paper describes catalytic cracking, with zirconia-supporting iron oxide catalysts in a steam atmosphere, of heavy oil, such as petroleum residual oil, to recover as much lighter fuel as possible. In this process, the heavy oil reacts with active oxygen species generated from steam over the iron oxide catalyst and significant amounts of lighter fractions and carbon dioxide are produced with almost no coke. Active hydrogen species generated from steam are added to the heavy and middle fractions, producing gasoline, kerosene, and gas oil (boiling points less than 350 degrees C). Large amounts of these lighter fuels (48 mol % C) were produced by the catalytic cracking of residual oil, which contained 93 mol % C of heavy oil fraction (boiling points above 350 degrees C), with a zirconia-alumina-iron oxide catalyst at 500 degrees C, with lesser amounts (20 mol % C) at 450 degrees C. More alumina was mixed to the catalyst to promote the cracking of heavy oil at lower temperatures. This modified catalyst was found to be better for cracking heavy oil, even at 450 degrees C, and the total amount of lighter fuels was as large as that obtained at 500 degrees C.