The possibility of intercalating oxygen to reduce the conductivity of graphite has been investigated by modified intermediate neglect of differential overlap 3 and tight-binding methods. The cluster calculations suggest that the most stable position for the oxygen atom is 1.25 A above a carbon-carbon bond. The tight-binding band calculation predicts the stage-I intercalated graphite to be a zero-indirect-gap semiconductor. Higher-stage intercalated graphite is expected to have a finite insulating gap whose value is governed by the carbon-oxygen interaction.