Lavender has been shown to help insomnia. Part of the problem is that we don't know exactly how the sense of smell works. Research is ongoing, but until the mechanism of scent is understood, the bigger promises of aromatherapy will remain anecdotal. Essential oils are substances that live in between the cells of plants and act as a sort of regulatory system. Depending on the plant, they help it adjust to its environment, fighting off parasites and disease, attracting insects to promote pollination, sending out toxins to discourage predators or weeds, and in some cases, even sending up a cloud of vapor to protect the plant from the sun.
Steam distillation is the preferred method of extracting oil.
Using a series of vats, water is boiled and the steam forced up through the plant matter, exuding the oil. The resulting vapor is collected and the oil separated out. While it can be extracted from the flower, leaves, bark, stems and roots, it still takes an enormous amount of plant matter to produce a small amount of oil. For roses, the requirement is 2000-3000 kg for the same yield. The purest oils are priced accordingly.