When sunlight strikes oil on the surface of water, a variety of colors are observed. what is the best explanation for this observation?

The reason is light scattering.

The sunlight that falls on oil we perceive to be white in color. But in fact that light is made of all colors (purple, blue, red, green, yellow, orange, red...). All these colors have same intensity and come under same angle so they combine and give white light. 

Each of these colors has different wavelength and different frequency. Depending on the wavelength of a color it refracts on oil under different angle. After exiting molecule of oil all color exit at different angle. This is reason that the do not combine and do not give white light. We see them as individual colors.

Ibelieve the correct answer would be c.