While some veterinarians will allow the use of lavender oil for certain issues; NOT ALL oils are safe for dogs; whether they are diluted or not.
If a dog has sensitive skin, clove oil and cinnamon bark oil have been demonstrated to cause dermal irritation; similarly cedarwood and lemongrass (common ingredients in herbal flea sprays) can cause irritation.
Be careful, particularly if you dog already has allergies, when using essential oils - some have benefit but others don't.
If you want to use essential oils, consult a holistic vet first.
Cymbopogon narduus is citronella - I use a product containing this and I find it very effective against insect bites (and my male has allegies so I'm always looking for things that will help him). I'm told lavender can also be effective in controlling the itchiness associated with bites but I've not tried it directly.