Alcohol consumption is a well‐established risk factor for the onset and progression of fatty liver disease. An estimated 90% of heavy drinkers are thought to develop significant liver steatosis. For these reasons, an increased understanding of the molecular basis for alcohol‐induced hepatic steatosis is important. It has become clear that autophagy, a catabolic process of intracellular degradation and recycling, plays a key role in hepatic lipid metabolism. We have shown that Rab7, a small guanosine triphosphatase known to regulate membrane trafficking, acts as a key orchestrator of hepatocellular lipophagy, a selective form of autophagy in which lipid droplets (LDs) are specifically targeted for turnover by the autophagic machinery. Nutrient starvation results in Rab7 activation on the surface of the LD and lysosomal compartments, resulting in the mobilization of triglycerides stored within the LDs for energy production. Here, we examine whether the steatotic effects of alcohol exposure are a result of perturbations to the Rab7‐mediated lipophagic pathway. Rats chronically fed an ethanol‐containing diet accumulated significantly higher levels of fat in their hepatocytes. Interestingly, hepatocytes isolated from these ethanol‐fed rats contained juxtanuclear lysosomes that exhibited impaired motility. These changes are similar to those we observed in Rab7‐depleted hepatocytes. Consistent with these defects in the lysosomal compartment, we observed a marked 80% reduction in Rab7 activity in cultured hepatocytes as well as a complete block in starvation‐induced Rab7 activation in primary hepatocytes isolated from chronic ethanol‐fed animals. Conclusion: A mechanism is supported whereby ethanol exposure inhibits Rab7 activity, resulting in the impaired transport, targeting, and fusion of the autophagic machinery with LDs, leading to an accumulation of hepatocellular lipids and hepatic steatosis. (Hepatology Communications 2017;1:140‐152)