Water is corrosive and non-lubricating. So if you get water into your hydraulic oil then you get a lot of rust and grinding which reduces the lifetime of the equipment. It is possible to make water based hydraulics, this is essentially what the mains water supply is. However this requires other materials like teflon, PVC and stainless steel. These are more expensive and wear out faster. Especially for the pressures of a typical high power hydraulic system. And some designs such as gear pumps are not feasable with these materials without lubricant.
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