A system and method of performing oil displacement by a water-gas dispersion system includes a micro-bubble generation apparatus, a gas source, an ultrasonic oscillation controller, a protective barrel and a support. A first opening is provided in a top end of the protective barrel, into which an internal apparatus enters and is extracted, the first opening is sealed by an end cover. A second opening communicating with a water flooding pipeline is provided in a side wall of the protective barrel, into which fluid flows and from which the fluid exits. The micro-bubble generation apparatus is fixed within the protective barrel by the support. The gas source is connected with the micro-bubble generation apparatus through a gas pipeline, for transporting gas to the micro-bubble generation apparatus. The ultrasonic oscillation controller is connected to the micro-bubble generation apparatus through a signal line, for controlling the micro-bubble generation apparatus to generate micro-bubbles.