Toyota Repair: Toyota Pickup repair, whole 9 yards, toyota pickup repair

Question
Hi Mike,

I've just got a few questions for you...

So, my Grandpa left me his 1991 Toyota pickup. (22RE engine)  400,000kms on it.  This truck means the world to me, so I decided to rebuild the engine.  The timing chain needed to be replaced, so I decided since it's all apart, I'd just do a rebuild.  
So firstly, I'd previously owned a 4runner, and kept on top of the maintenance.  I'd do an oil change every 3000-5000km..and when I did, I noticed that the oil that I drained was still semi-clear.  Almost like it was just put in.  And, I never really thought about what turns oil dark.  My best guess is that if oil gets past the rings, and burns, it will darken.  Am I correct in this assumption?  My question, is that after the rebuild of my 22re engine, during an oil change, the drained oil is black. During the rebuild I had the head rebuilt at an engine shop.  They re-surfaced it and did a valve job.  new valve stem seals...the whole 9 yards.  When I checked the cyclinder walls, amazingly they were not glazed, still had hone marks, and were perfectly straight, so I didn't get the cyclinders bored or honed.  I replaced the piston rings and the gaps checked out perfect, the whole length of the cyclinder.  I also replaced the main bearings, rod bearings, and both crank seals.  all gaskets are new.  I torqued everything to spec, even cleaned and chased the threads on all bolt holes. The reason for all the detail is that the oil in my truck now is about 4000kms old, its really black, and about a pint low.  ?  There is no visible sign of leakage..so can you please give me your best guess on why this may be?
My last question is regarding gas mileage.  After the rebuild my check engine light came on, and the diagnostic told me it's the O2 sensor.  So I replaced it.  The light was still on.  A mechanic asked me if I had holes in my exhaust, and I most certainly do. The mechanic thinks that the sensor is reading too much oxygen, so the light comes on.  There is a big leak in the manifold, and several holes in the pipe.  My current mileage is about 350km to a tank of gas, and I think this is terrible.  I do plan of fixing my exhaust, but I wanted to know if you think this will cause a dramatic change in the gas mileage, or if you know how badly an exhaust system full of holes affects gas mileage.  
Your professional input is greatly appreciated.
Thanks,

-=Dax=-

Answer
Combustion gases turn the engine oil dark, and as it gets older it loses vescosity and changes color also.
You may have also been flushing out some solvents used during the rebuild.
Dark doesnt nec. mean bad.Keep it full and cahnge 3-5K miles and shell keep on truckin.
Fix the exhaust. The o2 sensor meters fuel by shortening or lenthening the fuel injection duration. If it cant measure acurately because of exhaust leaks, anybodys guess what it will try and do. Its an input to a computer.
With a computer, the old saying goes....
Garbage in- garbage out.

Mike