The growing scarcity of conventional oil resources has intensified the focus on shale oil, known for its abundant reserves. Nevertheless, in the process of shale oil retorting, a substantial quantity of harmful waste oil shale residue (OSR) is generated. In this study, OSR and bituminous coal sourced from Fushun City served as the raw materials for the production of Si–Al–Fe alloy in a DC electric arc furnace, proposing a novel way to efficiently utilize OSR. The experiment summarized and analyzed the current oxide reduction theory, combined with the actual experimental results, focused on investigating the phase transformations of OSR during the reduction process. Based on the gaseous suboxide-carbide reaction theory, the reduction mechanism of pellet raw materials at high temperature was proposed. Results showed that the pellet raw materials will first undergo high temperature decomposition during the reduction process, and generated a large amount of carbides. Carbides subsequently reacted with metal suboxides produced in the high-temperature zone of the electric arc furnace to yield alloys. The element distribution of the obtained alloy product was non-uniform, the metallic Si phase was closely adjacent to the SiC substance, and the Fe in the alloy significantly enriched the reduced Al and Ti elements.