Rust inside frame.
 

Hello,

I got a old Japanese bike that I have been cleaning and fixing. It is looking very clean and nice now, but I noticed today when I took the screws to attach a bottle holder that there was some rust inside the frame. From cleaning with a ear bud it seems to be just surface rust but I can't be entirely sure of that.
Would this pose much a problem in the future. I tried spraying as much oil inside the two small holes(5.56 crc multi purpose).

Is there anything else I can do?

Also the old plastic around the brakes has been sitting in a warm garage too long. It looks like if someone melted the plastic with a flame and now it has turned into rubbery hard stuff. It must be a old type of plastic, any idea how to remove this stuff?

Thanks,

You can clean some of the rust out with a shotgun barrel bore cleaning snake.
Treat with Framesaver:
Robot Check

Hoods?
A little heat from a blow dryer or paint heat *** and a scraper.

depends on how much want to keep the bike, inside surface rust is common with older steel frames

I like to take off all parts and give the frame an oxalic acid bath, others here like to use phosphoric acid and other products

afterwards coat it with JP Weigle frame saver

There's also products that, when applied to rust, turns it into...I dunno what. A black surface that's ready for paint or some other treatment. Hardware stores will have it. I'm not at home at the moment, so I can't tell you what it is. Not naval jelly, it's a liquid you immerse the piece in.

Phosphoric acid... which is what naval jelly is. Or you can get the white milky looking stuff which primes as well. In either case, phosphoric acid converts iron oxide (rust) into iron phosphate (black stuff). You can use coca-cola to the same effect. Paint Over Rust with Extend Rust Neutralizer from Loctite Adhesives

or maybe you are talking about an oxalic acid bath? I don't think that causes the rust to turn black though, so I'll assume you are referring to the product linked above.

I've done several oxalic acid baths. Works great but can be a bit of a hassle. It's sold as wood bleach at many hardware stores, comes in powder form. I by Savogram brand wood bleach from my local Ace Hardware. About $10 for a pint size container that will last a while. Mix about a tablespoon or slightly more per gallon. I get cheap inflatable kid pool (seasonal item, sometimes hard to find this time of year) and fill it with the mixture then let the frames soak for a day or two depending on how bad the rust is. It shouldn't hurt the paint or decals but can leave a slight film if you leave it in too long or have too strong a concentration. Great for treating rust inside and out. you can also toss in all the steel parts, nuts, bolts, etc. (just not alloy parts) to de-rust those as well. But it is toxic stuff and you should avoid skin/eye contact.

Another alternative is to get a de-ruster and fill the bike. I just did this over the last weekend and worked great. I used Evaporust. Less toxic and biodegradable. Purchased the large (gallon?) size bottle from an auto parts store for $25 and used about a third of it. Bought some rubber plugs from a hardware store for about $5, and plugged the BB shell and head tube. Plugged all the drain holes, water bottle cage mounts, dt shifter mounts, BB cable guide hole, etc., then filled the frame from the seat tube. If you are only concerned about a thin rust layer inside the tubes, this is what I would recommend.

Thanks for those tips. At the moment I have don't have the experience and time to take apart the bike and lay it in acids.

So I applied fish oil and lanolin(Sheep wool oil) through the two screw holes and the seat hole.

Any idea how I can remove the headset so I can do the same there as well ? I added a picture.

Thanks,

Squirt some penetrant at the retaining nut. Then loosen the bolt at the top center of the stem a couple of turns, tap it down and the stem should rotate. If so, pull it out.
Use a small punch or flat bladed screw driver to tap the retaining nut free. The spacer washer should lift out and you should be able to hand unscrew the large flat bearing retainer. Have a pan there to catch the ball bearings as they may not be caged. They will come pouring out the top and the bottom.