What is created when CO2 displaces oxygen in a fire extinguisher?

There is no chemical reaction involved. The CO2 simply acts like a heavy blanket, pushing the air from around the fire away. A more complex physical reaction happens as the CO2 is discharged: the sudden drop in pressure as the liquified CO2 expands results in a rapid drop in temperature, producing pellets of dry ice (solid carbon dioxide). The cloud you see when a CO2 extinguisher is activated is mostly water vapor condensed from the atmosphere by the cold gas.