This guide will not cover the Shivering Isles expansion pack. As far as I understand, that should be one of the first things you install.

My system

• Core 2 Duo 1.9 MHz
• Intel Integrated X3100
• 2 gigs of RAM 

Preliminary

• Before you do anything, defragment your hard disk.
• Upon completion, install Oblivion. I recommend installing it to a location you have write access to; on my Windows 7 system it's installed in "c:\users\james\saved games\oblivion"
• Patch aforementioned oblivion installation
• Get the Oblivion Mod Manager, hereby referred to as OMM. OMM will make it quite easy to backup, install, and remove mods. You should endeavor to 
• Install 7-zip. You may or may not need it, but it's very handy.

Now, let's go for some basic, essential stuff. Grab the Unofficial Oblivion Patch. It fixes a ton of bugs and issues with the base game. I am using the version 3.2.0 OMOD. 

Performance mods

Note that some of these mods overlap with each other. To override conflicts, hold Ctrl and click "Yes." I have ordered the mods so that you should be able to overwrite previous files and still get the largest performance boost.

Operation Optimization

Oblivion PolyGone Overhaul (Overwrite conflicts)

RPG_BlackDragon LowPolyTrees 1.0

Low-Low-Poly Grass 1.5

LowRes Cyrodiil Complete parts 1 - 5

De-Parallax 1.1

Config file tweaking 

Handy links