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Well, a few reasons. More is NOT better for oils! The molecules in therapeutic grade essential oils are so very small that one drop holds a lot. The oils work chemically in your body by filling receptor sites in your cells. Once those sites are all filled, the oils will circulate in your system for a few days, filling additional sites as they become available, but eventually will break apart and be flushed from your body.
It's better to use 1 drop 3 times throughout the day than 3 drops all at once, in most cases. If you dilute, you can control the amount of oil molecules more exactly, and not overload and waste oil.
By making more efficient use of the oil, you are saving money. For instance, it is recommended to dilute Joy™ one-to-one, meaning one drop of oil to one drop of V6 or other pure diluting oil. That gives you two applications of Joy™ for the price of one!
Plus, when oils with small, light molecules are blended with oils with larger, heavier molecules, they actually last longer in the body before being metabolized, so they are available longer when receptor sites become available. This means you don't have to apply them as often as you would an unblended oil.
Diluting is appropriate for topical use and for internal use. In fact, in many cases it is recommended to avoid skin irritation and to promote dispersion.
You should always dilute oils before applying them to children and other small animals (cats or dogs). I have been told that some oils should not be applied to cats even if diluted. I have also heard that any oil from certain brands, used with caution and properly diluted, can be safely used on a cat. Please do some research and use your own judgement on this. Melissa Shelton, DMV, has written several books, including the Animal Desk Reference. Her website, http://www.oilyvet.com/, might be a good place to start.
There are oils that are recommended to be used "neat" (undiluted) by all the sources I found. Some are blends that can already be considered diluted because they are mixed in a carrier oil. Some are very gentle single oils. And there are situations when you will need the pure essential oil without "contamination" from any carrier oil, even pure ones. You will need to use your own judgement and knowledge of the person to whom you are applying oils and the reason why you are applying them. It's best to consult a trained aromatherapist or healthcare professional; some oils should not be used on pregnant women or people with certain medical conditions.
Generally, you do not want to use diluted oil in your diffuser. Diffusers are not designed to deal with the carrier oils, and can get clogged up. That's why some diffusers are not recommended for use with blends that have heavier carrier oils already in them.
I'm finding conflicting information about dilution ratios. The bottle labels are not always in agreement with the Essential Oil Desk Reference, and even the 4th Edition EODR has some differences with the 5th Edition EODR. Plus, some verbal information from sources I trust is different from other references.
What I'm doing is using the greatest dilution ratio I see or hear about. The reason for that is explained above - the molecules are so very small that even a greatly diluted drop holds so many that I feel I will get plenty. I can always apply more if I think I need to. And I always keep some undiluted to diffuse.
In the standard Raindrop Technique, undiluted oils are used. Some of those oils are very strong, or "hot". It is intended to be an intense application of oils to support the immune system, to help correct damaged DNA programming, and to help with detoxifying the body. Practitioners should keep a bottle of V6 handy in case the recipient is sensitive to some of the oils they are applying, to slow down the absorption of the oil into the skin.
As I mention in my "About Linda" page, I am no longer doing Raindrop Technique as a regular practice. I feel there are other ways to accomplish the same result in a much gentler fashion. If you go to a Raindrop Practitioner, make sure they have diluting oil available and that they know all of your health issues and allergies, and that they are knowledgeable about the safety issues and contra-indications of all the oils they are using.