I think that is mostly for heat dissipation. I run my oil/water separator like eight inches off the outlet port of the compressor. As you witnessed while airing up, it lets some oil through. Now that may be because it's from Harbor Freight, but I also think a lot of it has to do with heat.I called Portland comppressor today and the guy told me I would need to install my convelesing water filter 25' from the pump. That is the only way it would work properly. I may have to do an ARB or VIA air.
I've thought about adding a second inline separator, but it doesn't really bother me. Just gives me the peace of mind knowing my rims aren't rusting from the inside out.
I've also heard the figure of "three feet" be tossed around as well, so who knows what the exact figure is. I think it depends on the setup and separator being used.
You could run the ARB's off an ARB mini compressor, and then run a CO2 setup for tire needs.