The palladium-catalyzed liquid-phase reaction of benzyl alcohol to benzaldehyde was investigated in the presence and absence of oxygen by attenuated total reflection infrared (ATR-IR) spectroscopy. The 5 wt % Pd/Al2O3 catalyst was fixed in a flow-through ATR-IR cell serving as a continuous-flow reactor. The reaction conditions (cyclohexane solvent, 323 K, 1 bar) were set in the range commonly applied in the heterogeneous catalytic aerobic oxidation of alcohols. The in situ ATR-IR study of the solid-liquid interface revealed a complex reaction network, including dehydrogenation of benzyl alcohol to benzaldehyde, decarbonylation of benzaldehyde, oxidation of hydrogen and CO on Pd, and formation of benzoic acid catalyzed by both Pd and Al2O3. Continuous formation of CO and its oxidative removal by air resulted in significant steady-state CO coverage of Pd during oxidation of benzyl alcohol. Unexpectedly, benzoic acid formed already in the early stage of the reaction and adsorbed strongly (irreversibly) on the basic sites of Al2O3 and thus remained undetectable in the effluent. This observation questions the reliability of product distributions conventionally determined from the liquid phase. The occurrence of the hydrogenolysis of the C-O bond of benzyl alcohol and formation of toluene indicates that Pd was present in a reduced state (Pd) even in the presence of oxygen, in agreement with the dehydrogenation mechanism of alcohol oxidation.