We can’t fry food with water because its boiling point is lower than that of oil. Generally all food materials contain water in an occluded from or as water of hydration.
We fry food essentially to remove this water. For this, the food needs to be heated beyond the boiling point of water (100 degrees C). If we use water as the frying medium, the water from the food cannot be removed as the medium itself gets vapourized.
However, oil can be heated to more than without charring the food. Being nonvolatile at this temperature, heat from the oil facilities frying.