Oxygen Sensor on a 1981 BMW 320i
(North American model; automatic transmission)

There are a number of posts (on www.BMW320i.com ) referring to the location of the oxygen sensor and the procedure to reset the warning light associated with it. 

The lesson I learned recently is that the O2 sensor really plays an important role in the smooth running M10 engine! If the sensor is not working (and you can't tell just by looking at it), then the idle speed of a warm engine can be irratic, and it can cause the engine to stall while you're waiting for a traffic light to turn green.

I have to admit that I took the easy way out, and had my local garage mechanic replace the O2 sensor.  I was too busy and it was too cold to do it in my unheated garage.  But here's my story.

I've only had the car since July of '02; and except for an irratic idle speed and a few parts that needed to be changed, it's been very good to me.  The 'hunting' (up and down) of the engine has been there whenever the engine was warm and I was stopped in gear.  After about seven months of this, the O2 sensor light came on (it's co-located with the seat belt warning light on my dash), and it stayed on.  Three weeks later I had it replaced, and my idle problems went away!!

In the Haynes repair manual, specifically the North American supplement at the back, it says the O2 sensor should be replaced every 30,000 miles (48,000 km).  Although it also states that "the lamp will automatically go out when the sensor is replaced", that is not true.  My mechanic said the local BMW dealer would have to reset the light; but I gleaned that info on the www.BMW320i.com forum and did it myself.

Where is the oxygen sensor?

It's located under the exhaust manifold, near the front.  If you stand on the driver's side of the engine, and use a mirror positioned just down below the front of the shroud for the exhaust manifold and angled slightly rearward, you'll see the green wire leading to the sensor.  Figure 1 refers (I used an old bicycle mirror to take the pic.)

Reseting the lamp. You'll need to get under the driver's floor pan to do this:  follow the cable from the drive shaft up and forward to the black reset box.  There are two buttons with rubber protectors there, and it's the lower (more forward) button that resets the oxygen sensor warning lamp.  I removed the black cover and used a screwdriver to push the reset button in - approximately half an inch.  Replace the rubber cover, and you're all done!  Figure 2 refers. (My air conditioning piping is kind of in the way.)

Good Driving!