[Al Watsky]

Paraffin wax is a typical "old school" sanding lube. you can also use it with pumice and or rotten stone. Mineral oil, and other oils can also be used.
Water can be used in cases where the finish has been applied with oil and even when it hasn't if your careful.
With store bought shellac water will be fine I bet, try adding a drop of dish soap to help keep the paper free of build up. What does the can say as far as additives ?.