Ethanol is widely used in various pharmaceutical and cosmetic formulations in order to enhance skin penetration of active ingredients. While it is well known that ethanol partitions into the skin and enhances the permeation of both polar and nonpolar molecules, the exact mechanisms by which it enhances skin permeability are not fully understood. Several mechanisms have been proposed including lipid extraction from the stratum corneum (SC), fluidisation of SC lipid bilayer, alteration of SC protein conformation and enhancement of the drug solubility in the SC lipids. In this study, we performed molecular dynamics (MD) simulations of SC lipid bilayers comprised of an equimolar mixture of ceramides, cholesterol and free fatty acid in the presence of aqueous mixtures of ethanol. Various unrestrained MD simulations were performed in the presence of aqueous ethanol solution at molar ratios () ranging from = 0 to = 1. It was found that ethanol enhances bilayer permeability by dual actions (a) extraction of the skin lipids and (b) enhancing the mobility of lipid chains. Ethanol's permeation enhancing effect arises from its superior ability to form hydrogen bonds with headgroup atoms of skin lipids. Further, the free energy of extraction of ceramides (CER) and fatty acids (FFA) from the lipid bilayer was studied using umbrella sampling simulations. The free energy of extraction of CER was found to be much higher compared to FFA for all ethanol concentrations which shows that CER are difficult to extract as compared to FFA. Finally, the permeation of benzoic acid drug molecules through the skin lipid bilayer is shown in presence of ethanol molecules. It was found that ethanol selectively targets the FFA of the skin lipid bilayer and extracts it out of the lipid bilayer within few microseconds. Further, ethanol penetrates inside the lipid layer and creates the channels from which drug molecules can easily cross the lipid layer. Our observations (both in unrestrained and umbrella sampling simulations) are consistent with the experimental findings reported in the literature. The simulation methodology could be used for design and testing of permeation enhancers (acting on skin SC lipid lamella) for topical and transdermal drug delivery applications.