In the stride toward the production of low-carbon-footprint commodity chemicals, the development of a complete wood biorefinery plays a pivotal role. The lignin fraction of wood can be depolymerized and demethoxylated mainly into 4-alkylphenols. These phenolic compounds can further catalytically be C-dealkylated within the H-ZSM-5 zeolite at relatively high temperatures and in the presence of steam, producing phenol and olefins. Experimentally, the dealkylation reaction was found to have two striking features: first, different reactants possess very different reactivity. 4-Ethylphenol (4-EP) is somehow less reactive than 4-n-propylphenol (4-n-PP), which is in turn much less reactive than 4-isopropylphenol (4-iso-PP). Second, cofeeding of steam in the reaction mixture was necessary to prevent rapid and reversible catalyst deactivation. Herein, a combination of static and dynamic density functional theory (DFT) simulations is used to unravel the molecular and mechanistic origin of these observations. Free-energy profiles obtained from static calculations confirm the experimentally observed reactivity sequence, where our computations show that the secondary nature of the alkyl carbon involved in 4-iso-PP dealkylation strongly stabilizes the respective transition states. To investigate the effect of water on the mobility of the reactive species and their interaction with the active site, we investigated the diffusion of phenol along the H-ZSM-5 straight channel in the presence of water loadings from 0 to 3 molecules per zeolite unit cell. We show that water has a strongly beneficial effect in promoting desorption and diffusion of phenol away from the Brønsted acid site through competitive adsorption and by the formation of hydrogen bond chains with the diffusing phenol. This effect could lead to a shorter residence time inside the zeolite, preventing active site poisoning and condensation to bulkier biphenylether moieties.