NOTE:
We never got Real Time Dynamic Shadows in Oblivion due to the Console market. Don’t expect stuff that would be beyond stuff the Console market could pull off. There still the same consoles as back in the days Oblivion was launched.
Considering that you brought it up, the Oblivion engine barely scratched the surface of what could be done on the consoles, mainly because the development team did not have experience with the new consoles and were rushed to finish the work they had to do for the new consoles. Oblivion should not be considered as the cap for what the engine could do and I am sure that Beth will have had enough time to straighten out the mess since then.