The flow-pattern transition has been a challenging problem in two-phase flow system. We propose the terahertz time-domain spectroscopy (THz-TDS) to investigate the behavior underlying oil-water flow in rectangular horizontal pipes. The low water content (0.03-2.3%) in oil-water flow can be measured accurately and reliably from the relationship between THz peak amplitude and water volume fraction. In addition, we obtain the flow pattern transition boundaries in terms of flow rates. The critical flow rate Qc of the flow pattern transitions decreases from 0.32 m3 h to 0.18 m3 h when the corresponding water content increases from 0.03% to 2.3%. These properties render THz-TDS particularly powerful technology for investigating a horizontal oil-water two-phase flow system.