From the 1994 Classic D&D rules:
Oil is carried in glass flasks. It is often thrown at monsters (on one round), then lit (on the following round) to cause 1d8 points of damage. Before the oil is effective, however, a successful hit roll must be made against the target to break the flask on the monster. Then a character wielding a torch (or some other flame) must make a separate hit roll to light the oil. This hit roll is made against AC 9 (plus or minus cover modifiers) instead of the creature‘s normal AC, however, since all the attacker is trying to do is touch the torch to the oil.1994 Classic D&D, page 44
I’ve generally seen oil used more like a Molotov cocktail, with a fuse of some sort lit and the flask hurled grenade-like at the monsters. Not always–in fact a player used a torch to light previously-thrown oil in a game just last week–but it’s definitely the most common usage. I think oil is a bit over-powered, considering that we’re talking about lamp oil, and I’ve house ruled it down in various way over the years. But, as I’ve been trying to stick closer to BTB, I’m back at the 1d8 for two rounds right now.
The 1983 Mentzer rules were similar to 1994, though they refer to AC 10 instead of 9…which is clearly an error. The 1981 B/X rules don’t specify a process or the AC to use when trying to light oil, but they do state “The chance of oil catching fire depends on the situation, and is left for the DM to figure out.“
I rule that a character tossing flaming oil takes one round to prepare and light it and one round to hurl it, so the every-other-round attack rate is the same. Of course, two characters could team up, with one lighting oil each round and handing it to the other to hurl, allowing attacks every round. Or unlit oil could be thrown at a monster or onto the ground and a teammate could light it that same round.
Personally, I usually don’t use the AC 9 (or 10!) rule when trying to light oil and use the target’s normal AC, instead. Yes, you’re just trying to get the oil. But just like a “miss” against plate mail armor with a sword could indicate a hit that simply bounces harmlessly off the armor, I rule that armor and dexterity improve a target’s chances of avoiding significant harm from oil.
I’ve always kind of thought that the 1994 rules were a pretty good implementation, and I thought that the five levels covered were potentially a complete game. I know that there were a few things in there that I didn’t particularly care for, but back when I was debating my shift from AD&D to Basic, I considered 1994 before deciding on B/X.