All VW vans have a red oil warning light. Contrary to common belief, the oil warning light has nothing to do with oil level. I get calls from people all the time who remark that their oil light is on, but they just checked the oil level with the dip stick and it was fine. That is not the way this warning system works. Rather, the red light comes on when the oil PRESSURE drops too low as determined by an oil pressure switch installed on the engine. No VW van ever came from the factory with an oil pressure gauge or oil level indicator, just a low oil pressure warning light.
One-switch system: 1948-1985
When the engine is not running and there is no oil pressure at all, with the ignition switch in the ON position, the oil pressure warning light comes on. The red indicator gets its positive signal from the battery through the ignition switch. It gets its ground signal through the oil pressure switch, which is normally closed when no pressure is present. As soon as the engine starts and the oil pressure comes up, the switch opens at between 2 and 5 PSI, breaking the ground circuit to the idiot light, and it goes out. Whether the engine has one or five quarts does not matter. If there is enough oil in the engine to fill the oil filter plus around half a quart, the oil pressure will come up and stay up. The first time you go around a curve and the oil sloshes to one side in the engine, the oil pump will suck air instead of oil, the pressure will drop, and the light will flash, sometimes without being noticed. This is not a good situation and can lead to rapid engine seizure. Whenever the oil pressure light comes on, it is cause for concern and action IMMEDIATELY. An oil level indicator would be a much better measure of problems to come, of the better-pull-over-and-check-it-out-soon variety. But the oil pressure light means: "STOP, YOU HAVE NO PRESSURE, ENGINE FAILURE IS SECONDS AWAY." Really, this is what it means. It is like your heart stopping in your chest.
Two-switch “dynamic” system: 1986-1991
Same as the earlier system—when the engine is not running and there is no oil pressure at all, with the ignition switch in the ON position, the oil pressure warning light comes on. Same as before, the red indicator gets its positive signal from the battery through the ignition switch. The ground path, however, is controlled by a little oil "dynamic pressure warning system” computer located behind the speedometer. This later system employs two switches on the engine. One of the two works the same way as the one switch on earlier systems. It is a normally closed (low pressure-blue in color) switch that opens at between 2-5 PSI. The other switch is located at the rear of the engine, to the left of the V-belt pulley, closer to the oil pump. This switch is a normally open (high pressure-gray in color) switch which closes at between 11-15 PSI. Besides the input from these two switches (ground signal or open signal), the computer also gets engine speed information from the ignition system. At engine speeds below around 1800 RPM, the computer ignores the high pressure switch and the system behaves pretty much the same as the older system, except the oil light flashes instead of just coming on steady. At engine speeds above 1800 RPM, the system starts to look at the high pressure switch to make sure it closes (is supplying a ground to the computer). If that switch does not close and stays open at elevated engine speeds, the computer knows something is up. The computer tells the idiot light to flash, AND it sets off a warning buzzer. This system is a much better safeguard than the earlier system. When operating correctly, it gives you a much earlier warning of problems to come. Now instead of oil pressure having to be pretty much non-existent for the light to come on, you get a flashing light and buzzer if it drops below about 15psi. That gives you a chance to pull over before all hell breaks loose.
The problem with this system is that it is not very well understood by most shops. The system will often give false signals, and it is invariably incorrectly traced to the most expensive part of the system: The computer, which is almost NEVER bad. The usual culprit is one of the switches or the more elaborate wiring to them on the engine and on the back of the instrument cluster. The most cost effective way to fix a system that is giving false warning is to replace both switches and the harness on the engine (no longer available from VW, so we make new ones: see below). If after doing so the system is still sounding off, it’s time to check the oil pressure with a gage. If the pressure checks out okay, you might want to replace the printed circuit board with the improved GW version—which could, in fact, solve other problems in the process. If the pressure check reveals it is on the low side, and you have verified that the correct oil weight is being used (15/50 synthetic or 20/50 petroleum-based oil), the system is probably not lying, and you indeed have a low oil pressure issue. You may have worn engine bearings common on high-mileage engines... Maybe it’s time for a fresh GoWesty engine? At the very least, it might be time for a high-volume oil pump kit.
The main reason the computer is replaced first is, quite simply, because it's the easiest thing to replace. In order to replace it, you first have to remove the instrument cluster (read this article for instructions about removing the instrument cluster). Then, remove the electrical plug from the back of the speedometer. Be very, very careful: DO NOT pull on the printed circuit foil. Instead, carefully pry the PLASTIC PLUG with a small screw driver. Remove the four screws that hold the speedometer in place, flip it over, and you will see how the control unit snaps into place.
The oil pressure switches are a bit more difficult. The one that makes the light come on at engine speeds ABOVE idle (the high pressure switch) is the one back by the water pump. Getting to that one requires the removal of the V-belts. That switch screws into a steel adapter that, in turn, screws into the engine block. Sometimes the adapter comes out with the switch, and you have to transfer it over to the new switch.
The other switch is on the driver's side of the engine under the cylinder head. You have to work from underneath. There is a sheet metal plate—it protects the push rod tubes—that attaches to the engine block in two places and at the exhaust ports on the cylinder head in two places. Usually, you can just take those two bolts off the engine block (they are easy to get to) and one of the two bolts at the cylinder head—the one toward the front of the vehicle is the easy one. Then, you can pull the sheet metal part down and out of the way, and you will see the switch located right between the two center push rod tubes. I actually replaced one of these in Baja, while on my back in a parking lot, with some basic tools.