Water can only get so hot before it boils away.
Oil can get much hotter than water.
Certain kinds of chemical reactions, like the browning of starches and the caramelization of sugars, only happen at temperatures above the boiling point of water.
Because oil is liquid, even if your pan or pot heats unevenly, the oil will transfer the heat until all the oil is the same temperature, which lets things cooked in the oil cook more evenly than without.
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