The lamp kills all enemies and lights all torches on its path after you throw it. Originally the plan was to have an AOE tied to it but this went along with some other ideas we had to cut and didn't end up making it into the final product.
You gain more sanity than you lose oil when you light a torch. I think the main issue is how fast you lose oil as you play. When you hit zero sanity the blue ghost appears and begins pursuing you. Its not a definite death sentence but you are forced to play much faster than you'd like to.
The blue ghost isn't killable but you can push him away with a lantern throw though you probably aren't getting it back at that point.