1. open the Oblivion.ini in
/my documents/mygames/oblivion/ with a texteditor like notepad.exe
2. search for bAllow30Shaders=0, set this to bAllow30Shaders=1
3. search for bForce1XShaders and make sure it is set to bForce1XShaders=0
4. save the Oblivion.ini
A default installation of Oblivion use only shader model 2.0, now your video card should use shader model 3.0
note: this works only with video cards that supports shader model 3.0