The light you're seeing isn't oil level - it's oil pressure.
The first thing I'd check would be the oil pressure sending unit - in fact I might just replace it out of rote and see if that resolves the issue.
If that doesn't fix it - well - it's been a while since I worked on an aircooled VW BUT I seem to recall there was a spring behind the pressure sending unit (my memory of the exact location may be in error) - anyhow you can sometimes fix low oil pressure by removing the spring - stretching it a bit (to give it greater length, which should equal more resistance) and re-installing it. Eventually you'll want to get a new spring. Don't go nuts on stretching the spring - it just needs a little tug - not a gigantic yank!
If "adjusting" the spring doesn't turn the trick it's possible that you've got a knackered oil pump - but the fact that it's spurting out all over the place would lead me to believe that it's just fine.
You should really drain out the oil and just put the correct amount back in - your pushrod and other seals will thank you - and you won't be oiling the pavement ....
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