The Middle Permian Lucaogou Formation in the Santanghu Basin (northwest China) develops one of the thickest salinized lacustrine organic-rich shale (SLOPS) in the world. The SLOPS has been proven as sources for crude oil and tight oil, as well as sources and reservoirs for shale oil in the basin. A total of 52 SLOPS samples were collected from the second member of Lucaogou Formation (P(2)l(2)), and analyzed by mineralogy and element geochemistry, in order to reveal the paleoenvironment, provenance, tectonic setting and shale oil potential. The results imply an evolution of paleoenvironment from anoxic, saline to dysoxic-oxic, freshwater lake, which is caused by an increased freshwater influx. Early in the P(2)l(2), volcanic ash and hydrothermal fluids have increased the nutrient level in the lake and therefore elevated the bioproductivity. The P(2)l(2) SLORS is originated from intermediate volcanic rocks, accompanied by minor proportions of basic volcanic rocks. The parent rocks of P(2)l(2) SLORS have experienced weak degree of chemical weathering, and probably derived from a continental island arc setting. Micro-, nano-pores (inter-grain pores, inter-crystalline pores, dissolution pores and organic matter pores) and microfractures are widely observed in the P(2)l(2) SLORS, which provides sufficient storage space for hydrocarbons. The P(2)l(2) SLORS is dominated by carbonate minerals, quartz and feldspar, which are all brittle minerals and favourable for artificial fracturing. Comprehensive study indicates that the upper P(2)l(2) SLORS hosts a better shale oil potential, due to the relatively high TOC, abundant micropores and microfractures, and high brittle mineral contents. In addition, individual element geochemical parameters in the Santanghu Basin should be used with caution, for example, the paleoredox proxy U/Th and paleosalinity proxy Sr/Ba are also influenced by volcanic and hydrothermal activity. This implies that a multi-proxy analysis should be applied during the study of paleoenvironmental conditions.