Summer 1958; local boy Danny Rizzo meets Sandy Olsson, an Australian girl on vacation with her family, at the beach. They are instantly attracted to each other, spend the summer together and fall in love. Sandy is sad when the summer ends; she has to go back to Australia and worries that they will never see each other again, but Danny is more optimistic and feels that their love is just beginning.
School starts, and the students of Rydell High head back through the doors again. Danny meets up with his friends, a group of greasers called the T-Birds; they are joined by the Pink Ladies, a group of greaser girls lead by the uber-sarcastic Rizzo, and her friends Frenchy, Jan and Marty.
Sandy has enrolled at Rydell as well; her parents have decided not to return to Australia and are staying in the United States. On her first day she is befriended by Frenchy who introduces her to the other Pink Ladies. Danny and Sandy have no idea the other is at Rydell, and so recounts their independent versions of their summer romance to their friends. Sandy;s is a very romantic version, Danny's is a little more suggestive. When Sandy tells Frenchy the name of her summer love, Rizzo almost chokes on her soda. She arranges a surprise reunion but although Sandy is wildly happy and exuberant about their meeting, Danny, after an initial rush of romantic happiness, quickly returns to his bad boy nonchalance, almost brushing Sandy off, which upsets her greatly. Pretty and blessed with a aunny personality, Sandy is quickly snapped up by Tom, a jock who runs track.
Danny has other things on his mind; car racing. Kenickie unveils his car, the Greased Lightnin', that he is going to restore in his car maintenance class, and once restored, he plans on racing her.
Sandy is invited to a slumber party at Frenchy's house, with the other Pink Ladies. It's the first time she has smoked a cigarette, curled her hair or drunk alcohol, and she throws up when Frenchy pierces her ears in the toilet. Rizzo leaves the party early to meet Kenickie. They sleep together and the condom they are using breaks; they are interrupted by T-Birds rival gang leader Leo and his girlfriend, Cha-Cha, who used to date Danny before getting together with the Scorpions leader.
Danny finds that he wants to impress Sandy and to win her over once again. He decides to become a jock too, ditching his greaser leathers for a letter sweater, and persuading Coach Calhoun to let him run with the track team. They decide to go out on a date, but it is a disaster when their friends join them; Rizzo and Kenickie have a fight and break up. Frenchy has a visit from her guardian angel; after a mix up in beauty school she accidentally turned her hair candy pink, and her angel advises her to go back to Rydell.
The school dance is to be broadcast on national television, hosted by DJ and small screen heartthrob Vince Fontaine. He flirts with Marty who is flattered and enjoys using his flirtation as an opportunity to get on television. Kenickie and Rizzo try to out-spite each other by bringing Cha-Cha and Leo as their respective dates. Danny and Sandy go to the dance together and dance so well during the hand-jive contest (during which the decorations, elaborately planned by Patty Simcox, collapse) that they are selected for the final dance off. Sonny pulls Sandy off the dance floor and Cha-Cha steps in and wins the contest with Danny.
Sandy is hurt, but open to believing Danny that the dance contest debacle was not his fault. She agrees to go on a date with him to the drive-in, but when he tries to give her his ring, ends up elbowing her in the chest. She sees the ring as a sign of his respect and commitment; he sees it as doorway to making a pass at her. His efforts are clumsy and Sandy jumps out of the car, throwing his ring back at him. Whilst they are at the drive in, Rizzo tells Marty in confidence that she fears she is pregnant, but Marty tells Jan, who tells Sonny, and the rumor is in full swing by the time Rizzo leaves the drive-in theater. Word also reaches Kenickie, but he is snubbed by Rizzo who tells him that if she is pregnant then he is not the father.
The Greased Lightnin' is restored and ready to race but on race day, as Jan gives Kenickie a lucky penny, he is knocked out cold by the opening of the car door. He is concussed and cannot race so Danny races in his place. The race is close, and dangerous, but eventually Danny out-races Leo, whose car spins on its own axis, causing Leo to leave. Frenchy finds Sandy sitting on the wall of the tarpits, watching the race from a distance. She realizes that she still loves Danny and wants Frenchy's help in winning him back.
Graduation day; there is a fair at school. Rizzo celebrates the fact that she is not pregnant after all by getting back together with Kenickie. Danny has done well enough on the track team to become a letterman and wears his sweater proudly to impress Sandy, who shocks him by coming to the carnival dressed in black leather and pretending to smoke a cigarette. The two reunite, and depart in the Greased Lightnin', which takes off and flies towards the sunset.
