After the release of 1985's Species Deceases EP including the single "Hercules", the band spent several months in 1986 touring outback Australia with Aboriginal group Warumpi Band, playing to small Aboriginal family groups and seeing first hand the seriousness of the issues in health and living standards experienced by Australia's outback indigenous communities. The band was galvanised by the experience and made these the basis of Diesel and Dust (1987), an album focusing on the need for recognition by white Australia of past injustices involving the Aboriginal nation and the need for reconciliation and environmental causes, issues both near and dear to the band. Featuring the singles "Beds Are Burning" (their biggest international hit), "The Dead Heart", "Put Down That Weapon" and "Dreamworld", the album debuted to worldwide critical acclaim.
The rhythm of "Beds are Burning" is said to be inspired by the noise of their vehicles' wheels on the corrugated dirt roads in the region. The track "Gunbarrel Highway" was not included on the United States release of the album. Reportedly, it is because the line "shit falls like rain on a land that is brown" was deemed too strong for U.S. audiences.
In 1989, Rolling Stone magazine ranked it number 13 on their list of the 100 best albums of the 1980s.