Good joke Fligg, good joke.
...But please make this a real mod...If it's possible. Come to think of it, even though your OP was a joke, it sounds reasonable. Would it be possible to use Oblivion as a type of source for emulating physics?
No, using Oblivion as a physics engine is not possible. Well, it might be, but it'd be too much of a pain to be worth-while.
Using Bullet, PhysX, or Havok as an external wrapper is possible, provided memory access to objects within Morrowind's memory space (easily handled by hooking a DLL into the process), but that requires a thorough knowledge of the format objects are held in memory and some kind of loading-interception to allow the collision meshes to be created. All that is possible, and if done, positioning would simply be handed over to the physics engine which might just be able to handle it. Of course, not nearly enough is known of the Morrowind engine internally to do this easily in the near future. But the concept is possible.
It would be possible in a new engine, though, wouldn't it? (not by the means mentioned)
Yes.