This sounds like your PC has got a lot to do to load data from your harddrive (and swap some back to it). You have your pagefile on the same harddrive that your game?
Anyway, try to disable Screen Effects, Water Reflections, and Distances in your games launcher under "Options" and see what it does to your performance. Maybe that helps...
Oblivion was the last Bethesda game that could run on the old AMD Athlon XP K7 processors. There never was any K7 with dual cores.
Minimum System Requirements
* Windows XP/Vista/Win7
* 1GB System RAM (XP)/ 2GB System RAM (Vista)
* 2.0 Ghz Dual Core processor