A very meager, slim, or frugal amount of resources, especially money or fuel. There are various variants of this idiom – live off (or on) the smell of an oily rag , running on the smell of an oily rag , get by off the smell of an oily rag.
If the idiom is used when referring to a car, it is being suggested that the car is extremely fuel efficient. If it is used when talking about money or food, it means you can survive on the absolute minimum necessary.
Example
I spent a year travelling abroad, and I lived on the smell of an oily rag to get by.
I still remember when I had lost my job, I was living off the smell of an oily rag.
My car is not trendy but, it’s more economical than most other cars. It runs on the smell of an oily rag