We investigated the structure and formation of surface and bulk oxide on Pd(111) as a function of temperature and oxygen pressure from ultrahigh vacuum up to atmospheric pressures by means of in situ X-ray diffraction. Our X-ray diffraction data of the quasi 2-D surface oxide layer are compatible with the structural model of a Pd5O4 layer proposed by density functional theory. In the temperature range from 650 to 950 K, the formation of the Pd5O4 surface oxide layer can be described by a constant oxygen chemical potential, giving evidence that its formation takes place in local thermodynamical equilibrium with the surrounding oxygen gas phase. Above 950 K, the formation of the surface oxide layer is no longer observed, and a direct transition from chemisorbed oxygen to bulk oxide takes place, implying that the surface oxide layer is thermodynamically unstable under these conditions. Our results suggest that the oxygen chemical potential stability regime for the Pd5O4 surface oxide layer is much smaller than recently predicted by density functional theory.