I have seen alot of sensors go bad in my day, My 93 XJ has had no less than three in its life. There are two ways to approach this situiation. One is to take the sensor wire and with the iginition on but engine not running ground the sensor wire to a GOOD GROUND. If this means usng a jumper from the negative battery post then do it. The gauge should read 80 psi or be pegged at the highest point in its sweep. Remove the ground and it should fall to zero. If this is the case then your sensor is bad.
Another more reliable way is to use a mechanical oil pressure gauge. I have an old autometer gauge that I hook up to check for oil pressure issues. If it reads 40 psi on the cluster then check it with a mechanical gauge and see if it is off or not. When you do replace the sender get a good quality one. I have had some luck with Borg and Beck senders as well as the curent one which I believe is a Chrysler one as the local parts store was out of quality name brands and had only china knock offs.
I did run into a situation once where the gauge said I had too much oil pressure. I hooked up the mechanical gauge and it read 95 psi! This is very bad as well as it will not only blow apart your oil filter(making a huge mess) but the oil will actually eat at your bearings due to the high pressure. In this case the oil pump pressure relief valve had become stuck. After replacing the oil pump the pressure was fine.
As for your oil mist thing that is probably blow by. Every vehicle that has alot of miles on it has it to some degree. Mine has almost none and that surprised me as it has 188k on it and I drive it hard alot. I opened my cap while running and I got some small oil splatter from the rocker nearest the cap as I reved it to 2000. Nothing much at idle.
One other thing of note I did run into a vehicle that was poorly maintained once that had ****ty pressure at steady cruise and my gauge proved it. At idle the pressure was ok. I ened up taking the oil pan off and found small bits of hard sludge that had migrated to the pick up screen and plugged it causing oil starvation. After removing these bits and replacing the oil pump/bearings it had excellent pressure. On very rare ocations has the gauge/cluster circuit board been at fault.

-- Edited by tjhawk at 02:31, 2009-02-20

Metal work is so easy if you have the equipment,small grinder$45, 1 hour a day, $50 for undercoating, and patience, since it is not his DD has he thought about a engine swap, find an 88-95 chevy 4x4 truck, ford, or a junk yard driveline , the most expensive parts (Advance Adapters) he would have a very hard core wheeler, especially with all the tech that is in this GLXJ club/MotionOffroad, he should check into his options, and the main question is he a GLXJ member? I might know some people who could hook him up! LOL

I can understand about wanting tne brute power of a small block in your XJ. I had a SB Ford in my 1977 CJ and it was wicked fast. I could hill climb at the dunes and really tear it up in the desert. My only problem was when I wanted to crawl it sucked because it had too much power(if there is such a thing) and I was always spinning the tires when I needed them to grip. Also the sheer work of plumbing the new driveline, re-routing everything that is now in the way of other things. I think I spent about a week straight working out all the bugs and telemetry of plumbing the P/S, getting the right coolant hoses ect. I had literally an entire junkyard at my disposal and that engine swap was still a real pain in the arse. In the end it looked cool and sounded great but I think that if I had to do it again I would have just rebuilt the stock 4.2 litre and been done with it.
Personally I love my 4.0L. It has gobs of torque and plenty of power for the trail/street. I also love that I have 7 main bearings for more strength where others have 5 (or less if it is a V-6). Heck just about everything is easy to work on on my 4.0 compared to many other engines. I mean seriously try changing spark plugs on anything now days and its takes forever and you have to remove just about everything. They kept the 4.0 simple and easy to fix. In my opinion if you plan on keeping the vehicle, replace the engine with a new one and spend more time on the trail and less time working on debugging an entire driveline swap.

I have been watching ebay and craigslist 4.0 have been going for cheep