While oils can reduce friction, they don't eliminate it altogether. And while there is some friction, there are more subtle things at work. First, why is there any friction at all? Well, virtually all physical contact and interaction involves friction in some way. Even water flowing through a pipe experiences some drag along the walls, and even with itself (though this is not strictly friction). Friction can be loosely defined as 'what you don't know about a system', but practically is how we represent certain changes in energy, typically by creating heat. Oil is more viscous than water, meaning it flows less readily. We might characterize this as 'thickness'. What this means on a microscopic scale is that the molecules don't move past eachother as quickly as they do in water. It takes more effort to move them around, so more energy of motion (e.g., rubbing your hands together) is converted to heat energy, though at a slower rate in most cases than with bare hands. You can visualize a thin layer of oil as being many very thin sheets sliding past eachother. As these sheets move, they can heat up. Oil also tends to keep heat in itself (it insulates), so any heat generated tends to stick around for a while. The next effect is that your hands are not really very far apart, so they may collide in very small places from time to time as you rub them together. Oil is still between them, but is so thin in parts that you can get friction anyway. In fact, on cold days it may be easier to get heat with oil than without because the oil allows more contact than cold skin, and transmits heat from the hands. This brings up the third point, conduction. Your hands give off a good amount of heat. This warms the oil and changes it's characteristics slightly. As mentioned above, when oil heats up, it tends to stay warm. Putting oil on your hands increases the amount of surface area that can make contact. The tiny grooves in your skin trap oil and give it some heat. That heat can be transmitted through the oil, and also causes more of the oil to move along with your hand than if your hand were perfectly smooth. You can see this leads us back to the first point. It all works together!