You absolutely need to play with mods. Get Oscuro's Oblivion Overhaul; it's a must. Vanilla Oblivion is unplayable with how it scales enemies to your level and never makes you feel powerful.
Also get Oblivion XP to change the leveling system to that of Fallout, meaning you gain XP and choose where to allocate points in skills yourself.
Absolutely gets OOO and Oblivion XP. Do not play the game without either of these.
Other mods are optional, but definitely look at the flowchart posted upthread.
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