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

Optimized illumination

Script Optimization 

Oblivion PolyGone Overhaul (Overwrite conflicts)

RPG_BlackDragon LowPolyTrees 1.0

Short Grass 

Low-Low-Poly Grass 1.5

LowRes Cyrodiil Complete parts 1 - 5 

De-Parallax 1.1

Config file tweaking 

Config file location: C:\Users\James\Documents\My Games\Oblivion

By default, when you choose the "Very Low" graphical setting, the game will drastically reduce the number of textures used. This makes the game run quite fast, but also makes it quite ugly and near impossible to navigate by roads. Here, I provide an alternate ini file which falls somewhere between "Very Low" and "Low", while still remaining quite playable.

Handy links

TweakGuides - http://www.tweakguides.com/Oblivion_1.html

This is a completely invaluable config guide for getting the most out of Oblivion. If you'd like to improve upon my config, this is a must read.