Phenol formation from benzene with a Pd membrane has been simulated by ab initio periodic density functional theory (DFT) method (DMol(3)) to investigate the nature of the active oxygen species and the energy profile of phenol formation. An oxygen atom that is produced by the reaction of hydrogen permeating through the Pd membrane is the most likely active species. The reaction of benzene and oxygen atom to form phenol on the Pd surface is energetically probable (the total energy gain of the reaction is about 0.6 eV). Adsorption of phenol is not stronger than that of benzene, but rather a little less stable. In the presence of a larger amount of benzene in the gas phase, benzene can expel phenol from the surface, which thus represses the successive oxidation of phenol and continues the catalytic cycle. (C) 2003 Elsevier B.V. All rights reserved.