The rotary engine provides high power density compared to piston engine, but one of its downside is higher oil consumption. A model of the oil seals is developed to calculate internal oil consumption (oil leakage from the crankcase through the oil seals) as a function of engine geometry and operating conditions. The deformation of the oil seals trying to conform to housing distortion is calculated to balance spring force, O-ring and groove friction, and asperity contact and hydrodynamic pressure at the interface. A control volume approach is used to track the oil over a cycle on the seals, the rotor and the housing as the seals are moving following the eccentric rotation of the rotor. The dominant cause of internal oil consumption is the non-conformability of the oil seals to the housing distortion generating net outward scraping, particularly next to the intake and exhaust port where the housing distortion valleys are deep and narrow. Simulation with housing transverse waviness shows that increasing spring force can lead to an unexpected increase in internal oil consumption. Roughness and O-ring friction can also increase significantly internal consumption for small housing distortion. Calculated internal oil consumption is on the same order of magnitude as measurement.