virtualenv is a tool to create isolated Python environments.
The basic problem being addressed is one of dependencies and versions, and
indirectly permissions. Imagine you have an application that needs version 1
of LibFoo, but another application requires version 2. How can you use both
these applications? If you install everything into
/usr/lib/python2.4/site-packages (or whatever your platforms standard location
is), its easy to end up in a situation where you unintentionally upgrade an
application that shouldnt be upgraded.

Or more generally, what if you want to install an application and leave it be?
If an application works, any change in its libraries or the versions of those
libraries can break the application.

Also, what if you cant install packages into the global site-packages
directory? For instance, on a shared host.

In all these cases, virtualenv can help you. It creates an environment that
has its own installation directories, that doesnt share libraries with other
virtualenv environments (and optionally doesnt use the globally installed
libraries either).