Summary Mixed‐species forests generally sequester and store more carbon in above‐ground woody biomass compared to species‐poor systems. However, the mechanisms driving the positive relationship between diversity and above‐ground wood production ( AWP ) remain unclear. We investigate the role of competition for light and water as possible sources of complementarity among Iberian pine and oak species. Using tree core data from permanent plots, we test the hypotheses that (i) contrasting abilities of pines and oaks to tolerate shade will promote AWP in mixtures, while (ii) drought stress results in less room for complementarity. We found that pine species receive more light, develop larger crowns and grow 138–155% faster when in mixture with oaks. However, this positive effect of species mixing on growth was severely reduced under drought conditions due to increased competition for water with neighbouring oaks. In contrast to pines, oak trees were less responsive to mixing, primarily as a result of their ability to tolerate shade and water shortage. Mixed pine‐oak forests produce an average 48% more above‐ground woody biomass compared to monocultures each year. However, the magnitude of the diversity effect on AWP fluctuates with time, decreasing noticeably in strength during drought years. Synthesis . Complementary light use strategies among neighbouring trees are critical in explaining why above‐ground wood production ( AWP ) increases in mixed‐species stands. In contrast, drought causes trees in mixture to compete more fiercely for below‐ground resources, leaving less room for complementarity and causing positive diversity effects to lessen in strength. Together, these two mechanisms provide much needed context for AWP –diversity relationships in Mediterranean forests. Whether or not managing for mixed pine‐oak forests proves to be beneficial for AWP is likely to depend on how climate changes in the Iberian Peninsula.