Oxidative stress, a hallmark pathophysiological feature in diabetic kidney disease (DKD), arises from the intricate interplay between pro-oxidants and anti-oxidants. While hyperglycemia has been well established as a key contributor, lipotoxicity emerges as a significant instigator of oxidative stress. Lipotoxicity encompasses the accumulation of lipid intermediates, culminating in cellular dysfunction and cell death. However, the mechanisms underlying lipotoxic kidney injury in DKD still require further investigation. The key role of cell metabolism in the maintenance of cell viability and integrity in the kidney is of paramount importance to maintain proper renal function. Recently, dysfunction in energy metabolism, resulting from an imbalance in oxygen levels in the diabetic condition, may be the primary pathophysiologic pathway driving DKD. Therefore, we aim to shed light on the pivotal role of oxidative stress related to lipotoxicity and renal hypoxia in the initiation and progression of DKD. Multifaceted mechanisms underlying lipotoxicity, including oxidative stress with mitochondrial dysfunction, endoplasmic reticulum stress activated by the unfolded protein response pathway, pro-inflammation, and impaired autophagy, are delineated here. Also, we explore potential therapeutic interventions for DKD, targeting lipotoxicity- and hypoxia-induced oxidative stress. These interventions focus on ameliorating the molecular pathways of lipid accumulation within the kidney and enhancing renal metabolism in the face of lipid overload or ameliorating subsequent oxidative stress. This review highlights the significance of lipotoxicity, renal hypoxia-induced oxidative stress, and its potential for therapeutic intervention in DKD.