The hydrophobic effect is the common expression for processes where nonpolar groups in molecules are spontaneously removed from water. Thermodynamic analysis of hydrocarbon solubility in water, micellization and adsorption of surfactants show that the hydrophobic effect can be understood in terms of two contributions. The first contribution is attributed to the structuring, or rearrangement, of water molecules in the vicinity of a hydrophobe. This contribution is favorable, and hence increases the solubility of hydrocarbons in water, increases the cmc, and decreases the adsorption of surfactants. The second contribution is attributed to the formation of a cavity in the water in order to accommodate the hydrophobe. This contribution dominates over the first one and is unfavorable, i.e. it decreases the solubility of hydrocarbons in water, decreases the cmc, and increases the adsorption of surfactants. Thus, the cause of the hydrophobic effect is to be found in the large energy required to form a cavity in the water. On the other hand the temperature dependence of the hydrophobic effect is entirely determined by the water structuring, or rearrangement, in the vicinity of a hydrophobe.