Why does arduino work on usb power?
The arduino website states that the operating voltage of an arduino is 7-12V.


That's when it goes through the voltage regulator. It's a linear regulator, meaning it wastes a lot of power as heat. The regulator outputs 5V that's given to the MCU. The USB voltage bypasses the regulator and goes to a fuse before going to the common 5V for the board. If less than 7V is given to the regulator, it will produce less than 5V.


  Is it preferable to say run the arduino on an external 9V dc power source, or does it make no difference?


Usually, yes. A 9V supply would give you more than 500ma, giving you flexibility to add higher current components like motors and lots of LEDs. It will make no difference if you have a single LED connected.