The escalating consumption of crude oil, driven by rapid industrialization, poses a significant threat to terrestrial and marine ecosystems. Addressing the treatment of oily wastewater is imperative, given the environmental consequences and the loss of oil feedstock. Methods such as centrifugation, gravity separation, and chemical–physical membrane separation have limitations in handling stable emulsions, especially microemulsions present in water. In this study, we present an innovative approach utilizing electricity for the coagulation process. Electrocoagulation is employed, and the resulting oil particles are efficiently removed through low-tech physical methods such as sedimentation and filtration. To enhance efficiency and reusability, we introduce chitosan hydrogel-coated aluminium electrodes in the electrocoagulation process. The research demonstrates remarkable success, achieving a 99% efficiency in separating artificial oil–water emulsions. Optimal separation (95.85%) is achieved at a 10 mm inter-electrode distance, and efficiency increases with higher oil content, longer electrocoagulation time (up to 99.15% at 60 min), and increased voltage (up to 85% at 50 V). The chitosan-coated electrodes offer a sustainable and cost-effective solution by improving reusability and mitigating the need for frequent changes. These findings underscore the significance of electrocoagulation, particularly with chitosan-coated aluminium electrodes, as an efficient and eco-friendly method crucial for addressing oil removal in industrial processes.