In the fuel yes. Opinions range from 1/2oz to 2oz per gallon of fuel depending on who you ask. I've gone with the minimum amount, usually 8oz per fillup (I usually add 16 gallons of diesel at the pump).

Use the cheapest 2 stroke oil you can find for watercraft (TCW3). It is designed to be burned so a low-ash formula. We still had a couple of gallons from a boat we had many moons ago, so I've been burning that in mine. It does seem to help, not to mention the additional lubrication the extra oil provides for the IP internals.

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Current stable:
1995 E320 157K (Nancy)
1983 500SL 125K (SLoL)

Gone but not forgotten:
1986 300SDL (RIP)
1991 350SD
1991 560SEL
1990 560SEL
1986 500SEL Euro (Rusted to nothing at 47K!)

Gone and wanting to forget:
1985 524TD 167K (TotalDumpster™) [Definitely NOT a Benz]