I'm simply giving you my opinion. One of the things Fallout 3 improved on the most were how NPCs looked, and I've yet to see somebody say humans in Oblivion looked better than in Fallout 3.
The only reason you think Oblivion looks fine is because you're used to it. Saying you play Oblivion a lot is an understatement. But any game, no matter how bad it looks, can look perfectly fine after you get used to it. I've played many old games and obsessed over the graphics for the first day or so, but eventually I stopped focusing on them and never thought about the graphics again. But if you played half of the games that came out in the past year, and weren't so used to just playing Oblivion, you would see just how outdated the graphics are.
Anyway, as I've already said, yes, I think Bethesda will be able to make TESV look great. I don't know if it will have the same gap in graphics that Morrowind and Oblivion have, but I do think it'll look great.
I'm sad to say that since last October, I haven't played more than 40 hours of Oblivion. That's my latest save file says, and I have only been playing with this one character since October. Overall, I haven't played any more than 300 hours of Oblivion in my life. I love the game, but I haven't been able to play it like I used to. It's not because of the graphics, but I want something new. I haven't received a new game since last November though. That last game that I received is Assasin's Creed II, and I really don't think it looks much better than Oblivion. Aside from Assasin's Creed II and Fallout 3, I haven't received a new game in a year. I played a God of War III demo, but I still think Oblivion looks better than God of War III. I see the improved smoothness in the demo, but the graphics are all for blood and gore, things I don't find to be good-looking. I still stop and stare at Oblivion's landscape though. It's different. Graphics complement Elder Scrolls games more than all other games, in my opinion. Graphics in most games are for killing things, but not in Oblivion. Anyway, I really don't play Oblivion too much. I want to play it, but some obsessions of mine make it impossible and frustrating to try to play. Anyway, this is getting off-topic.
I'm expecting TES V to be released in late 2011 or early 2012. Even the thought of waiting that long is driving me insane. Bethesda needs a bigger development team if they expect to hold on to both TES series and the Fallout series. A six year wait between Elder Scrolls games is ridiculous. We should have TES V by now, but we don't have an announcement. I don't hate the Fallout series, but I can't stand this wait. Fallout 3 is a great game, but it's not an Elder Scrolls game, and leaving Elder Scrolls fans without anything for this long is ridiculous. For those who have been playing TES series since the time of Oblivion's release or earlier, this must be torture.