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Bob - few thoughts --
1) always remember that the oil level gauge will only work when both a) the engine is up to full operating temperature, and b) the car is stopped, with engine running, on a flat surface. If you're observing this erratic behavior while driving, it's probably normal if the gauge "behaves" in the above circumstance.
2) I had a similar issue with my oil level gauge -- bounced around like it was possessed. Fixed it by replacing the gauge. It's nothing more than a float that activates a variable resistor (similar to a dimmer switch) and the gauge reads the resistor's value -- over time/use, the assembly basically wears out -- fortunately, it's easy to replace -- the oil level sensor lives in the oil tank and is accessable by removing the right rear wheel and taking out a few small nuts. Sensor also is (Was?) pretty cheap. This may be one of the few situations where throwing parts at the problem (buying a replacement sensor up front) makes sense, as it'd likely be easier to simply remove and replace your current sensor as step 1 in problem solving -- a grounding issue would generally manifest as either no reading or pegged reading consistently -- be sure to pick up a gasket too, as you'll likely ruin the existing gasket while removing the sensor.
3) keep in mind that you should not rely on the sensor -- always check oil level with the dipstick, with engine fully warmed and running. Once you have a steady reading on your oil level gauge, you can see how it correlates to the dipstick level and, if necessary, bend the sensor's float to remove discrepancies. BUT again, don't rely on the gauge, verify with dipstick.
4) when you remove the old sensor, you might want to fish around in the oil tank a bit, you might find a lost dipstick or 3 while you're in there and you don't want a dropped dipstick to foul the oil level sensor.
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