Caffeine affects a person's blood sugar levels indirectly, producing a small rise in blood sugar levels via its effect on insulin resistance. While this doesn't make much of a difference in healthy individuals, people with type II diabetes or a history of hypoglycemia should closely monitor their intake of caffeine.
Insulin Resistance and Sensitivity
When people mention blood sugar, what they're talking about is glucose. Glucose is what your muscles and cells use for energy, though it must be broken down first. The body produces insulin in order to do that. Your body's "insulin resistance" is a measure of how easy or difficult that process is. People with a high degree of insulin resistance need to produce relatively more insulin in order to convert glucose into energy than those with low insulin resistance.
"Insulin sensitivity" is the opposite of insulin resistance. Think of it as how you body reacts to the presence of insulin in the blood. If your body starts converting blood sugar into energy when it detects a relatively low level of insulin, then you have high insulin sensitivity, and low insulin resistance. If it takes a high level of insulin in the bloodstream to convert glucose into energy, then you have low insulin sensitivity and high insulin resistance. People with the latter condition are those who are at risk for hypoglycemia or diabetes.
Caffeine's Effect on Insulin Resistance
Caffeine has been shown to decrease insulin sensitivity, thus increasing your insulin resistance, and raising blood sugar levels. Oddly enough, drinking coffee and tea has been shown to heighten your insulin sensitivity and to lower blood sugar levels. This is because although caffeine by itself does increase insulin resistance, the antioxidants in coffee and tea have a more powerful effect, lowering insulin resistance.
Hypoglycemia, or low blood sugar, often happens after meals, when the body produces a large amount of insulin in order to process the extra glucose in the blood. The large amount of insulin can drive blood sugar levels down below their normal threshold. You might think that at this point caffeine would be a good thing, since it increases insulin resistance. Indeed, it has been suggested as a possible supportive therapy for hypoglycemia, but it has other effects as well. Caffeine causes blood vessels to constrict, resulting in a decreased blood flow to the brain and central nervous system. This decreased blood flow means that glucose is delivered more slowly. Your nervous system interprets the slower delivery of blood sugar as a lower level of blood sugar. This detection error often results in food cravings, often for foods that will increase the low blood sugar effect.
If you don't have diabetes or hypoglycemia, this is no big deal. One more doughnut is just extra calories. For those who do suffer from the two conditions, the ability to correctly monitor blood sugar levels is critical to the mitigation and treatment of them. Anything that might throw that monitoring off is dangerous. Coffee is still OK, so long as it's decaf.