Water deficit stress limits net photosynthetic rate (AN), but the relative sensitivities of underlying processes such as thylakoid reactions, ATP production, carbon fixation reactions, and carbon loss processes to water deficit stress in field‐grown upland cotton require further exploration. Therefore, the objective of the present study was to assess (1) the diffusional and biochemical mechanisms associated with water deficit‐induced declines in AN and (2) associations between water deficit‐induced variation in oxidative stress and energy dissipation for field‐grown cotton. Water deficit stress was imposed for three weeks during the peak bloom stage of cotton development, causing significant reductions in leaf water potential and AN. Among diffusional limitations, mesophyll conductance was the major contributor to the AN decline. Several biochemical processes were adversely impacted by water deficit. Among these, electron transport rate and RuBP regeneration were most sensitive to AN‐limiting water deficit. Carbon loss processes (photorespiration and dark respiration) were less sensitive than carbon assimilation, contributing to the water deficit‐induced declines in AN. Increased energy dissipation via non‐photochemical quenching or maintenance of electron flux to photorespiration prevented oxidative stress. Declines in AN were not associated with water deficit‐induced variation in ATP production. It was concluded that diffusional limitations followed by biochemical limitations (ETR and RuBP regeneration) contributed to declines in AN, carbon loss processes partially contributed to the decline in AN, and increased energy dissipation prevented oxidative stress under water deficit in field‐grown cotton.