First of all, if you look at classic D&D, the player's materials (OD&D Vol-1, or AD&D PHB, etc.) contain descriptions of offensive resources like weapons and their damage, class abilities, attack spells, etc. Then burning oil gets described in the referee's book (Vol-3, or DMG), and it's like this "secret" resource that only expert players know to call out for. It's not something out in the open for regular players to opt for. And worse, if oil turns out to be a better weapon than some other element, then it will pretty quickly replace that other element in your milieu (maybe daggers, or slings, or hold portal spells, etc.), even if you didn't foresee your gaming being about oil-slinging adventurers, or whatever.
I mean, I've had acquaintances who were D&D players in other games proudly announce, "We got giant barrels of oil and just flooded the whole dungeon and lit it on fire from the outside, and got all the XP!" I mean: That game sounds like it royally sucks, man. And it's certainly not what the D&D game "says on the tin", so-to-speak.
Secondly, but a related point: Since oil is obviously such a secondary-thought bolt-on to the system, there's not much consistency to its effect. In OD&D the effect is actually nothing except for possibly scaring off pursuing monsters: "Burning oil will deter many monsters from continuing pursuit." [Vol-3, p. 12] -- in addition to the other options of food (for dumb monsters) and treasure (for intelligent ones). Although, in its brevity I guess that allowed lots of people to interpret their own damage statistics for oil, frequently numbers that rivaled fireballs or any other mundane weapon. In AD&D, this was officially set at 2d6+1d6 (over two rounds) for a direct hit from a flask of oil. Well hot damn, that's more than any other weapon in the system, see what I mean? (Exception: tied with a heavy lance or 2-handed sword vs. large opponent.) And that's just for one flask, when your players start asking for whole barrels of the stuff, and arguing that it does 20d6 or something per barrel, and whole exploding fire-ships in your naval game, what do you do then?
Thirdly, I don't even think that it makes real-world sense that you can use a flask of oil meant for burning in a lamp, and get it to explode like Greek fire in this way. I'm no chemist, but it sounds like someone's conflating different kinds of oil in a way that's not justified. Check out the Wikipedia page on Oil:
Organic oils are produced in remarkable diversity by plants, animals, and other organisms through natural metabolic processes. Lipid is the scientific term for the fatty acids, steroids and similar chemicals often found in the oils produced by living things, while oil refers to an overall mixture of chemicals. Organic oils may also contain chemicals other than lipids, including proteins, waxes and alkaloids...
Crude oil, or petroleum, and its refined components, collectively termed petrochemicals, are crucial resources in the modern economy. Crude oil originates from ancient fossilized organic materials, such as zooplankton and algae, which geochemical processes convert into oil. It is classified as a mineral oil because it does not have an organic origin on human timescales, but is instead obtained from rocks, underground traps, or sands; however, mineral oil by itself refers to a specific distillate of crude oil.
So it appears to me like you've got two very different kinds of substances that both happen to called "oil" due to a linguistic quirk. Which did medieval-style lamps run on? The former. ("The main fuel in Western nations was olive oil in ancient Mediterranean cultures, though extracts from fish, crude fish oil, nuts, and cheese were also used." Link.) Which does a weapon like a Molotov cocktail use? The latter. ("A Molotov cocktail is a breakable bottle containing a flammable substance such as gasoline or a napalm-like mixture and usually a source of ignition such as a burning cloth wick held in place by the bottle's stopper." Link.) Then I've also had friends start talking to me about the need to aerosol-ize the oil for weaponization, although I'm afraid that's not a claim that's within my personal area of knowledge. But clearly there's a reason why Greek fire was so special in the ancient world. ("Most modern scholars agree that the actual Greek fire was based on petroleum, either crude or refined; comparable to modern napalm..." Link.)
Therefore, I think that the next time someone asks for burning oil in one of my D&D games, my response will be: "This oil is actually olive oil for use in lamps, and it cannot burn in the open as a weapon." -- you know, quite a bit like the Gygaxian response to someone choosing to dig up some saltpeter and construct gunpowder in a D&D campaign (except perhaps better justified). Not that following real-world physics is a necessity, but more importantly because the gameplay I want is not about oil-slinging dungeoneers to the exclusion of their other weapons and spells; and as usual: real-life research solves a lot of game design problems.
Have I got the chemistry issue right? Would medieval lamp oil burn in the open like a weapon (or worse, explode)? And what's your take on the gameplay considerations?
(Photo by visionshare under CC2.)