To be fair, I think that was kind of the point. Giles was drifting around trying to find his purpose and his personality outside of watcherdom that season. I think that's why he bought the sports car, got back into touch with his musical side, and just generally did a lot of non-Tweedy-Giles sorts of things. I think he was trying to find Rupert, not Giles or Ripper, and that Olivia, being just a random and (most importantly) normal woman from back home, was part of that. I think he liked her because she didn't fit into his crazy, demon-filled life. In the end, I think he decided that Rupert was as long gone as Ripper, so he settled back into the role of Giles and opened the magic shop. It didn't work with Olivia precisely because she was too normal. She couldn't handle monsters and stuff. She didn't fit -- and Giles couldn't leave that life behind. It was part of him. So my theory is that he chose Giles' complicated (and sadly celibate) life in Sunny-D over Rupert and his nice, normal relationship with nice, normal Olivia.
