Note: Subsequent to my starting this page, a new tool has been made available that allows changes to the ini file and, in many cases, gives a description of several lines in the file. I have been using it for a few days and it seems to work fine. It's called Tweak Oblivion. Search for it on TES Source here. You will still find the information below useful.

The performance of Oblivion can be adjusted to your liking with more than just the Options button on the main menu. Visual Improvements and other modifications can be made in the Oblivion.ini file. The "ini" file is a text file that contains numerous game settings. For example, when you make a change to a setting on the main menu, it is saved in this ini file. Other features cannot be accessed from the main menu but can be changed in the text file. There are actually two ini files:

C:\Program Files\Bethesda\Oblivion\Oblivion_default.ini

C:\Documents and Settings\"Your User Name"\My Documents\My Games\Oblivion\Oblivion.ini

You want to adjust the second one. "Your User Name" will be different, depending on your access name. Mine, for example, says "Gerald Sherfy". Make a copy of this second ini file before opening it (right click, copy, then paste in the same folder). You can always change back to the ini file later if you screw something up by experimenting with the settings.Open the ini file with any text editor (Notepad, Word, etc.). After making any changings, Save it then close it. That's all you need do. To find the settings, do a search.

Blood. By default, blood will disappear within a few seconds in the game. There's a way to set the duration of the blood. To increase the time that blood stays on weapons, and to increase the amount of blood change these settings. Unlike the other settings in the ini file, the blood settings will revert back to the default if you open up the Video Options screen on the main menu, and will have to be changed again to get these effects. The first option, DecalLifetime, is the number of seconds blood remains on screen (180.0000 = 3 minutes). I have used 1800 with no noticeable change. The second apparently increases the total amount of blood: 

  fDecalLifetime=180.0000 

  iMaxDecalsPerFrame=500

Screenshots. To allow screenshots change this setting. Press the Print Screen key to take a screenshot. Depending on your keyboard layout you may have to press Shift+Print Screen; I don't. All screenshots will be saved in your main Oblivion directory as .bmp files and assigned a number: Screenshot1, Screenshot 2, etc. If you revert to your old ini file the number starts from the beginning again and any screenshot you create will overwrite any other screenshot with the same number; therefore, I suggest you move the screenshots out of there occasionally for safekeeping:

  bAllowScreenShot=1

Water. If you have a powerful computer you may want to experiment with reflections on the water; regardless you may see a frames per second drop. The following graphic settings change what is reflected in water, such as lakes. A setting of 0 (default) means it is not reflected. 1 means it is reflected. You don't need to turn them all on; from a distance I notice the greatest effect from the statics option. You are welcome to experiment:

  bUseWaterReflectionsMisc=1 
  bUseWaterReflectionsStatics=1
  bUseWaterReflectionsTrees=1
  bUseWaterReflectionsActors=1

Grids. This setting, GridsToLoad, changes how many cells adjacent to the cell you are in are preloaded in the renderer in-game. The default is 5. In other words, imagine a 10 by 10 grid, with you in the center, then 5 cells in each direction are rendered at the current settings. This affects the appearance of distance landscapes, creating the "soupy" hill texture you may have seen. If you don't care about distant textures being rendered, reduce the number to 3 to increase your performance. If you have a powerful computer and want to see things in all their glory, change to 7, 9, or 11. It is recommended you keep this an odd number:

  uGridsToLoad=7

Dialogue. Ever been annoyed by the way Oblivion handles spoken speech with NPCs? It zooms in so much you can count the hairs in the speaker's nose. There's a setting in the ini that allows you to change the zoom level. The higher the number, the farther away from the NPC you will zoom when you speak to them. I use 4.0, but you can experiment to whatever you wish. Here's the setting:

  fDlgFocus=4.0000

Saving on Exit. Another annoyance was almost every action I took caused the game to suddenly save for me. While potentially a handy feature if I'm afraid of a crash, I thought the save for every enter/entrance of buildings, resting, and travel excessive. The game allows resting, travel saves to be turned off with in game, but to stop it from saving when exiting buildings, you have to change this setting to 0:

  bSaveOnInteriorExteriorSwitch=0