The idea is to keep the oil that inevitably runs down the face of oil lubed journals and gets applied to outer surface of the rail from working into tread of the wheel by getting caught in the grooves.
When we ran fantrips, we always oiled up the journals on the not-so-frequently used freight cars. The seals on the back of the journal boxes were pretty much non-existent, and the oil would work its was out of the journal box, down the face of the wheel and on to the tread. After several miles, it was pretty obvious. When we would back up for a runby, getting started again on that snotty track was always interesting (and you fans thought all that driver slipping was for show).
Flange oilers are supposed to apply oil to the flange and to the fillet of the where the flange transitions to the tread. Sometimes they get out of whack, or get worn out and begin to oil the tread too. Then life gets interesting, and you find out how well the sanders work.
I wonder how well this worked.....