Oil of Immolation has a number of distinct uses: in PvE, it helps the Tank to gain extra threat on multiple targets (since the damage accumulates and is actually quite significant compared to things like Retribution Aura, Naglering and so on). Also, a raid group can cause a significant amount of extra AoE in a confined area, such as when fighting High Priestess Arlokk and her panthers. In PvP, it is useful for spotting hidden rogues, for classes that don't have AoE or stealth detection. Never forget to drink your Oil of Immolation when approaching a seemingly unguarded flag!
Patch changes
Patch 1.6.1 (02-Aug-2005): The Oil of Immolation effect is no longer affected by bonuses to spell damage from items.