The original diocese was founded about 970 by Emperor Otto I in the Billung March at Oldenburg in Holstein (Aldinborg or Starigard), the former capital of the pagan Wagri tribe.

After the Saxon count Henry of Badewide had campaigned in the Wagrian lands east of the Limes Saxoniae in 1138/39, a new Bishop of Oldenburg, Vicelinus, was appointed in 1149.

When the Duchy of Saxony was dissolved with Henry's deposition in 1180, the Bishopric gained the status of Imperial State (reichsunmittelbar).

Quarrels arose after the City of Lübeck gained imperial immediacy in 1226 and as the territory of the state was centered on Eutin, the town in 1309 became the residence of the bishops.

Between 1810 and 1814 the principality was annexed to France as part of the Département des Bouches de l'Elbe, before it was restituted to the Duchy of Oldenburg.

Following the Austro-Prussian War in 1867 the principality was enlarged by the prior Holsteinian bailiwick of Ahrensbök, as a compensation for hereditary claims of the ducal House of Oldenburg to Holstein.