You use a tinderbox with it
You take some Swamp Tar to the Chemist in Rimmington. Click and use the Swamp Tar on the lamp oil still (the small one, not the big one outside his house) and dip the lantern in to collect the lamp oil you had just made. Then finish the job by lighting the oil with a tinderbox.
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You don't but in order to get a lit oil lantern you should check out the crafting guide for more answers.
bright,colourful, maybe something to describe its pattern portable light, lamp, kerosene lamp, oil lamp
lantern?
lantern
The oil can is in the sort-of-hidden basement of Draynor Manor. You can go to the Quest Help under Game Guide in the Runescape website if you're having trouble getting through the maze.