Water has a massive effect on the performance of mineral oil as a lubricant.
Here's a simplistic but quick explanation: a typical mineral oil exhibits a property where the viscosity increases markedly under pressure. This characteristic is useful for creating the thin film that keeps apart the surfaces of the rolling element and the race in a bearing. Even though both surfaces are "smooth" - under a microscope they look like Switzerland (all peaks and valleys). The thin film of the oil keeps the peaks of one part away from the peaks of the other part. When the localised contact pressure is very high (when the peaks coincide) the fluid film becomes particularly viscous at that point and helps to keep them apart.
Water does not exhibit this increase of viscosity - and the presence of water in the oil reduces the oil's ability to keep the peaks apart. The peaks come into contact with each other and all sorts of failure mechanisms are triggered (wear and fatigue) as well as corrosion of the surface and spalling (due to deep seated corrosion).
If you took as your datum point a water content of 100 parts per million (ppm) and defined the service life of the bearing running in this oil as 1.0, then with all other things being equal, you could expect the service life of the bearing to reduce to just 0.52 when the water content rose to 400 ppm (a typical saturation level). Interestly, you could also expect the service life to increase to about 2.6 if you could reduce the water content to 25 ppm.
