They make it in a variety of particle sizes. For certain pitch devices (usually under 0.4mm) you need to switch to finer particle sizes (Type 5 typically is used for the small stuff).
I've heard this 'oxide layer' argument before (usually in regards to recycling swarf) and I don't buy it. Typically these oxide layers are measured in nanometers, something a few hundred microns across isn't going to lose an appreciable amount from a tens-of-nanometers-thick layer.
There are a few reasons. Smaller ball size means more surface area. When the paste flows, the surface tension of the solder makes it cling to the part and pad, and moves the part to align with the pad. With more surface area, you can start to get solder that clings to itself, making solder balls outside of the pad, called balling. This wastes solder and makes conductive components that are effectively contamination, they now have to be cleaned off, you can't let them remain to roll around and potentially make a short. I had issues with smaller balls clinging to stencils; i think the price is also higher.
I think there is a rule of thumb for choosing solder ball size, and it was something along the line of 5-8 balls should fit in the width of the smallest solder aperture. This will give good performance according to the component size without too much balling or other flow issues.
What are the tradeoffs on particle size?