If fuel is getting into the oil, I would say the needle and seat or float in carb is not stopping fuel flow. I would check carb again and adjust float level. Change or install an inline fuel filter too. Surging is almost always carb related. If problem persists after checking carb again, check governor springs. If they have been bent at all after removing carb, they can be bad. If you replace new governor springs and surging still exists, try doing a static setting on carb/governor. If your unit has an oil/centrifugal governor, move governor arm in the direction that opens throttle valve in carb all the way, hold in place, loosen nut on governor arm and grab small tang that goes inside engine and turn in the same direction you moved governor arm, rotate this until it stops, hold in place and tighten nut on bottom of governor arm. This is called a static/factory setting. Make sure throttle cable is in high position when doing this. Let me know if you have any questions. Good luck!
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