I'd say the torch radius is far too large and the torch is too bright when compared to real life. Radius is 768 units, which is about 11 meters or about 36 feet. When I make a large campfire like http://static.twoday.net/kraftwerk/images/Lagerfeuer.jpg in my garden the light radius is definitely less than 11 meters, more like 6-8 meters. The light is also not so bright, it's more a dark red/orange. And that even though it's a large fire and not a torch.
If you wanted the torch to be remotely realistic I guess you'd have to cut down the radius to 256 units and darken the light color by a good degree (so it's more saturated but not so bright). But that would probably not help gameplay, especially if combined with darker nights/darker dungeons.
EDIT: Corrected wrong unit calculations, radius is still too large though.
I never realized about everything you mentioned. I assumed the torch in Oblivion will at least be as bright as its real world counterpart. Apparently not.
Yes, you are correct that it would not help gameplay, using torch in the game would be pointless since it doesn't really allow the player to see something located even a few meters away. In fact it might cause harm to the player since any creatures/monsters lurking in the dark will immediately be able to spot you and attack without the player actually knowing where the threat is, not to mention any hidden and deadly traps.
I can't imagine how is it to travel at night during Medieval times. With fire (and perhaps moon?) as the source of light, I guess it will be difficult to travel anywhere far from settlements?
One thing to remember though, is that inside a dungeon, you should get a reflection effect that will help a bit. Just like if you use a flashlight - point it at the ground and it doesn't light up much, but point it at the ceiling and you can read a book. I remember the big black-out we had a few years ago! I actually always point my little track lights up to the ceiling - they light up a larger area that way.
Heh...black-out is not a rarity here. I think everyone around here has stock of flashlight and batteries just in case, as it happened often suddenly and with no notice. Anyway, I was under the impression that due to torch shining to all directions, it is brighter than flashlight and can enlighten farther but apparently this isn't the case.
Also, I have another question. Is a torch supposed to still lit during rain?