The brake fluid has been contaminated with oil. The low brake pedal is most probably due to the master cylinder seals being damaged by the contaminated oil.
Use a sponge to absorb the oil and clean the master cylinder reservoir. Top up with fresh fliud and check if oil is present. You might have to clean the resevoir a few times to get all the oil out.
Replace the master and bleed system and recheck the braking power and if oil is still present in reservoir.
September, 7, 2009 AT 1:50 AM
Once the fluid is contaminated with petroleum product, you MUST replace everything in the hydraulic system that has rubber parts or seals.
Three rubber hoses, two calipers, two wheel cylinders, master cylinder / reservoir, combination valve, and height-sensing proportioning valve. All steel lines must be flushed and dried. RWAL valve assembly or hydraulic control unit if you have rear wheel antilock brakes or four wheel antilock brakes.
I've been involved with three vehicles with fluid contamination. You will not achieve satisfactory results if you only replace a few items at a time. You will just keep on replacing sticking or leaking items until you finally replace everything at once, ... Or scrap the vehicle due to excessive expense.