Cooking oil works better since it can better absorb more heat and let it off, even the water would get a bit toasty after awhile.
nope, oil is worse for the job of removing heat. other wise we would fill radiators with oil instead and avoid the classic "there's oil in your water and water in your oil" scenario. however oil is not electrically conductive.
you can't really do what you're thinking about with wrapping the components, whatever you use would probably either melt or be far too innefficient at transferring heat (probably both). probably the best thing possible is a combination of conformal coating and dielectric grease like used in condensation proofing. the problem mainly lies in that components like the memory, processor and expansion cards still need electrical contact.