The stable isotope composition of atmospheric oxygen links the carbon and water cycles of the earth and allows the estimation of changes in terrestrial and marine productivities under different climate regimes. Calculated isotope composition of atmospheric oxygen, however, is nearly three per mil lower than that observed, with the lower value attributed mostly to uncertainties in the isotopic composition of leaf moisture. Here we present an experimental model to show that a previously neglected process accompanying oxygen transport in the terrestrial subsurface may induce a large fractionation at the soil-atmosphere interface. This additional fractionation is sufficient to reconcile the differences between observed and calculated values of the isotopic composition of atmospheric oxygen and provides self-consistent 18O budgets for atmospheric O2 and CO2. Our results contribute to a better understanding of processes controlling the isotope composition of atmospheric oxygen under present and past climates.