The diesel effect occurs in a hydraulic cylinder when air is drawn past the rod seals, mixes with the hydraulic fluid and explodes when pressurized. 

How does this happen?

When a double acting cylinder retracts under the weight of its load, the volume of fluid being demanded by the rod side of the 
cylinder can exceed the volume of fluid being supplied by the pump.

When this happens, a negative pressure develops in the rod side of the cylinder, which usually results in air being drawn into the cylinder past the rod seals. This occurs because most rod seals are designed keep high-pressure fluid in the cylinder and are not designed to keep air out.  The result of this is aeration - the mixing of air with the hydraulic fluid.

Aeration causes damage through loss of lubrication and overheating, and when a mixture of air and oil is compressed in a cylinder it can explode, damaging the cylinder and burning its seals.  As you have probably gathered, the term 'diesel effect' is a reference to the combustion process in a diesel engine.

by Brendan Casey