These two words cannot be used interchangeably.

’See’ is a more generic word and describes the fact that something or someone has been spotted. Also, it is used to point out that the eyes are being used as an organ of perception. Example: In this picture I can see a woman eating what seems to be fast food. While I was walking along the street I saw a stunning green dress in the showcase.

’Observe’ implies the action of looking at something or someone carefully for a while taking notice of every little detail and reflecting on it. Example: That elderly woman from the second floor used to sit on a bench observing the neighbours’ children so that they wouldn’t make a mass.