For some reason, whenever I use Really Almost Everything Visible When Distant, I get a huge FPS drop down to 4-9 FPS. Now I know mods like this don't really improve FPS, but I have a pretty decent rig (i7, HD6900, 8GB) and this drops my FPS down more than on my previous comp.
Feels like textures for distend objects are used in original high quality instead of replacing them with lowres ones. Might be something else - I'm not a good modder.
Any modders know what could be causing this?

That's pretty much normal. Oblivion's engine is horrible, it's LOD implementation is just as bad. You'll need to tone down the options, and reduce uGridsDistantCount to something like 17 to be able to get decent-ish performance.

Nope, even that didn't help one bit - set uGridDistantCount to 17 and still 6-9 FPS.
Something is not right.

Where are you looking at ingame? Like I said, if you have every single RAEVWD option enabled, your FPS will plummet. Cut back on the options, delete your DistantLOD folder and re-run TES4LODGEN.

I was looking in Oblivion.ini in mydocs\my games\Oblivion
Which options do you speak of? I have a RAEVWD version with 2 .esp files and some meshes / textures. I deleted DistantLOD folder and it went back to 40-45 FPS.

I meant ingame, sorry. RAEVWD has options, whether you install it as an OMOD, Manually or via BAIN. You'll need to uninstall it, then re-install it with less options. Disable the Imperial City, Cities, Higher Quality Walls and Rocks addons, just installing Core, Wilderness Architecture, Forts, Statues, Ships and Ayleid Ruins (no esp files). This should help quite a bit. If you still struggle, disable Wilderness Architecture.

The readme for the mod covers all of that and then some. Might be worth actually reading it....

RAEVWD can cause a big FPS drop even on top-end machines, particularly without lowering uGridDistantCount. At the same time, if you're getting single-digit FPS with an i7 and a 6900 something sounds very odd. What were your framerates before adding RAEVWD? Also, make sure you're not doubling up on LOD objects for i.e. the Imperial City by accidentally activating both RAEVWD's IC plugin and another one like from Better Cities.