A phase shift demodulation technique based on subtraction capable of measuring 0.03 phase degree limit between sinusoidal signals is presented in this paper. A self-gain module and a practical subtracter act the kernel parts of the phase shift demodulation system. Electric signals in different phases are used to verify the performance of the system. In addition, a new designed optical source, laser fiber differential source (LFDS), capable of generating mini phase is used to further verify the system reliability. R-square of 0.99997 in electric signals and R-square of 0.99877 in LFDS are achieved, and 0.03 degree measurement limit is realized in experiments. Furthermore, the phase shift demodulation system is applied to the fluorescence phase based oxygen sensors to realize the fundamental function. The experimental results reveal that a good repetition and better than 0.02% oxygen concentration measurement accuracy are realized. In addition, the phase shift demodulation system can be easily integrated to other applications.