A few hundred ppm of water can cause detrimental changes in the lubricating properties of engine oil. Electrochemical sensors based on electrochemical impedance spectroscopy and cyclic voltammetry were utilized to detect water leaks and continuously monitor the time dependent dynamics of water-oil interactions following the injection of water into industrial lubricant. Immediately following the injection, water molecules interacted with the oil additives (surfactants) forming a water-in-oil emulsion based on inverse micelles. Emulsification was followed by gradual loss of water from the solution through evaporation and electrolysis. On-line data were used to characterize the dynamics of water micellization, evaporation, and electrolysis. The values of kinetic rate constants and diffusion coefficients for the components of the water/oil system were determined. In order to support the experimental data and establish the kinetics of water-oil interactions, literature equations describing these interactions were adopted to develop a computational analysis model. The model illustrated the processes occurring in the water/oil system and resulted in an increased understanding of the recorded experimental data.