You know, there does not neccesarily have to be oil In the tanks. If the compressor was in the line of any exhaust or smoke, or in a poorly ventilated area, then you would have tainted air without actually having oil Inside. Alos, some of the compressors out there don't have tons of filtration and are very cheap and cheesy, to your detriment. The woman at the dive shop does not prove anything by putting a rag in front and turning on the air... I would definitely stay away from that shop and report them to PADI and the local ministries. If they are in the right, no harm done. If not, then you will have spared others from possible tragic endings.
Remember, CO2 or CO has no smell or taste, neither does "good" air. You are checking for the smell of pollutants in the air and tank. You also want to also be alert for headache,nausea, red fingernails and lips(symptoms of CO2 poisening.
In any case. Always go on teh side of caution. Dive safe. Trust that little voice that senses when things aren't right. You can always dive another day.