javascript closure - how come I refer to an undeclared variable

Either the example you've got is missing some lines or it isn't a proper example for closure. A better example (with simplified code) would be

function warningMaker(obstacle){

   return function() {
      alert("Look!" + obstacle);
   }
}

What the above does is, when the function is getting returned, the reference to the obstacle in the function body creates a closure so it will be in memory and will be used whenever called and it will be

warningMaker("Messi")(); // "Look! Messi"
warningMaker("CR7")(); // "Look! CR7"

Note that in the above, the function returned is being called. (I mean, the empty parentheses)