As I understand, the virtual machine and the guest OS doubles the amount of abstraction layers (that are computationally relevant) between the user interface and the pure power of the hardware. Some of the said abstraction layers are (emulated) hardware, drivers, IO interfaces, etc.

Top-notch virtualization solutions like Xen probably eliminate a few of these complexities, but I still wonder how efficiency is achieved in these environments; and whether manageable cloud servers are really worth the performance price.