It needs to be on the inlet side of the compressor, set to drip 3-5 drips per minute to oil the pump.
Read through this, it will explain what is needed to set it up. The system shown below does not have a oiler because it has a crankcase and is oiled that way, like a car engine is.
http://www.kilbyenterprises.com/web-instructions/oba_manual.pdf
