The method used to separate oil and water is:

A separating funnel is used mainly to segregate two immiscible liquids.  The mechanism involves taking advantage of the unequal density of the particles in the mixture. 

Oil and water can be easily separated using this technique. This technique is also used in the extraction of iron from its ore, the lighter slag is removed from the top by this method to leave the molten iron at the bottom of the furnace.

Hence, the method used to separate oil and water is a Separating funnel.