This study isolated a novel halotolerant Pseudomonas aeruginosa M4, that was able to degrade oil and produce rhamnolipids. Various carbon sources, nitrogen sources, inoculum ratio, pH, and temperature were tested to optimize the oil degradation conditions. The highest oil degradation rate of 85.20% and lipase activity of 23.86 U/mL were obtained under the optimal conditions (5% inoculum at 35 °C and pH 8). The components of degradation products at different times were analyzed to explore the mechanism of oil degradation by GC-MS. Short chain fatty acids of acetic and n-butyric acids were the primary degradation intermediates. The maximum rhamnolipid concentration of 1119.87 mg/L was produced when P. aeruginosa M4 used waste cooking oil (WCO) as the sole carbon source. Rhamnose precursors were synthesized from glycerol, a hydrolysis product of WCO. R-3-hydroxyalkanoate precursors were synthesized de novo using acetyl-CoA produced from β-oxidation of fatty acids. In addition, P. aeruginosa M4 had good salt tolerance up to 70 g/L. The findings show that P. aeruginosa M4 is a valuable biosurfactant producer in the treatment of WCO.