Oil floats on water and the displacement lubricator uses this fact to supply a constant oil feed to the engine. When the engine is under steam a small amount of condensate from the steam feed drips into the lubricator, as the water raises the level of the oil, it passes into the steam feed pipe, through the small hole in the pipe, and flows into the engine.
The lubricator will not work on air.
Good luck with the engine, and let us know how you get along.