Thanks for writing in,
It sounds like your guy has a condition known as seborrhea oleosa, which is that smelly oily skin you are reffering too. There is also usually a secondary skin infection, in his case sounds like a mix of bacterial and yeast. What I would suggest you do is bring your dog to the vet so that they may do a full derm exam on your guy. Based on what they find on a skin cytology, they will start him on oral antibiotics and also likely oral antifungals as well as give you a medicated shampoo to clear that skin. For the itching you can give him 1mg/pound of regular benedryl up to three times per day which will help some, but until we get the infections under control your guy will continue to lick and have this smelly skin. I hope this helps to give you some directions with your little guy!
Dog Veterinarian
Veterinarian, Dog/Cat Veterinarian