If they've been burning up the pump, I think they have air trapped at the high point of the riser, resulting in lower NPSHA. Is there any way to check that?
As to your questions:
How does the oil on top of the water effect the head? The oil adds to head according to (ft of oil)*(S.G. of oil).
The riser pipe is under the top oil level, how does this rise and drop effect the suction need by the pump other than normal flow loss? As long as the riser remains fully flodded with water, then normal friction is the only loss.
They have been burning up the pump and not sure what they should do. Would a 6 in Line help? Some, but not much - A 6" line would gain you about 2 feet of NPSHA.
lowing the Riser pipe? If it's kept flooded, only by the friction due to length of suction pipe removed.