Why does oil bubble when you fry things?
The oil is bubbling very simply because of the water inside the object (eg: potato) that is rapidly vaporized when come into contact with the very hot oil.

Incidently this is a very good thing as done right, all the water coming out of the object keeps it from taking on too much oil, which would cause you to have over-greasy food.

Edit: Also note as @SF commented below, that this can also be a very BAD thing if you put something with too much water into hot oil. Adding this in so nobody burns themselves.