You do need oxygen to be present
http://en.wikipedia.org/wiki/Rust
However the by-products of combustion are CO2 and H2O and these combined (in a pool particularly) form carbonic acid which starts pitting the metal and starting the rusting process (this is why you middle and end mufflers rust out first in your exhaust system, water pools in them).
ANYWAY - lovely thread pulled back from the dead.
Lets be honest, if you dont plan on keeping your car for more than 2 years, it shouldnt really matter because if exhaust wrap is a problem, it wont be yours. If you do plan on keeping the car for ages, HPC coat it for that underhood porn.