I know the question reveals my ignorance, but if you've got only a little bit of water in there there's still a lot of lubrication, although obviously the oil isn't going to work the same as if it was pure.<br /><br />British Seagull outboards actually relied on water entering to form a water / oil emulsion. There was something wrong with it if it didn't have water in it. So at least one motor could handle it. Admittedly it was 140 grade oil, so there was a bit of scope for changed viscosity compared with modern oils.<br /><br />Engine oil changes in cars with dilution from fuel blow by, although it's probably nothing nowadays compared with 40 years ago, so they can handle a bit of dilution as well. I don't know that milky oil in an auto crankcase matters all that much in service (in the old days plenty of cars ran like it for ages if the water was kept up to them) except it indicates a water leak somewhere which might be costly to fix and which might cook the motor if the water leak isn't fixed. Auto crankcase oil would seem to be working in a harsher heat and lubrication environment than a marine gearcase surrounded by cold water with no combustion in it.<br /><br />Why is a little bit of water so bad in marine gearcases?