I think the OP has made two mistakes:
1. Over estimating the capacity of video game AI/development
2. Under estimating the inventiveness of players
Just because you can dream it up that shouldn't mean that it should be implemented.
Dude I WORK IN GAME DEVELOPMENT. As a coder in fact and I have implemented AI that is far more in advance of what Bethesda have done on the whole (I mean in terms of AI reaction and stealth mechanics BTW. In fact my AI and stealth mechanies [censored] all over this game's). The animating and graphics department have done a top job but the AI and game design are a huge let down. Have you played Fallout 3? Hell have you played Fallout 1? They do exactly what I'm talking about. If an npc dies and it kills a quest chain it is piss easy to inform me of my mistake. Then if I want to undo my action I load a previous save. It's not hard at all. In the Fallout games you get different quests depending on your actions. You can take a contract to kill bandits but actually go and side with the bandits, go back to the contracter and kill his entire town. You have choice and your choice impact the game world and have people react to you. Joining a faction means other factions treat you differently. This kind of stuff happens in Fallout, Dark Souls, Deus Ex and others. So why not in supposedely the 'greatest game ever'?
Are none of you guys even a little pissed off that you've been lied to about countless features? Are you not annoyed that in terms of choices you absouletly no control over how to react to situations? If I talk to a person I generally get one response to give which is always 'Yes I'll bend over backwards and be your [censored]'. What kind of system is that? It's been said by previous people in this thread that freedom is an illusion in this game.
And the reason why I wanted to go around killing is because the main story and most of the side quests are repetetive garbage that I have no interest in. After a while I accepted that I couldn't kill everyone so I decided to hunt down some bandits. I found a great fort full of about 15 of them. Killed 13 while they were sitting in chairs and one guy when he was about to hit a practice dummy. Was awesome to wait until he was about to strike and then slit his throat while he was mid strike. THAT IS AWESOME. But that is the only time I've felt pumped about being an assassin, even killing targets that are killable. The stealth system is totally half baked.
In that same fort I went up behind the main bandit and tried to slit his throat or put knives through his chest in a stealth kill. What happens? I hit him in the back and he turns around and kicks my ass. Why does the stealth cinematic only happen as a reward if my one hit is going to kill the bandit? Surely as a reward for not being seen and sneaking up behind someone I should GET A ONE HIT KILL on a bandit. Tenchu did this brilliantly. You were rewarded for good play by flashy one hit kills. And why do I only get one of two cinematics? I'm sick of seeing me slitting someones throat in the same way over and over. Would it have killed them to add soem variety?
Going back to the earlier point of the one hit kill system. Not having it happen as a sneak attack every time I hit an unsuspecting enemy (within reason, just humanoids is fine) means that stealth characters are totally gimped. What option am I left with after I hit a guy with my strongest attack from behind? I then have to fight head on and as I'm not a warrior I get hammered. There are other problems as well. If I stealth kill someone or sneak attack in anyway, I DON'T GET A ONE HANDED STAT POINT. That is totally [censored] stupid. That means I can't improve my damage output without fighting people head on. I'm an assassin for [censored]s sake. Fighting people head on results in death.
I had hired thugs come after me while I was attacking a bandit camp at night. I was in shadow, in sneak mode, on top of a turret a good 50 meters above them. But after thye murdered the bandits they just strolled up the stairs and found me like it was obvious where I was. What kind of [censored] is that? I have a sneak of 100 for [censored]s sake. I'm basically invisible in the dark. To make matters worse they walked right up to me and then lost where I was. So what they could see me through stone but they can't see me when I'm ten feet away? At this point I went behind one of them and one hit executed him. He screamed out and blood sprayed out right in front of his two mates, and THEY JUST STOOD THERE. I did exactly the same thing to the final two. Not seeing me? Maybe. Not seeing their mate die right in front of them? [censored] stupid. Completely ruined what might've been cool. Bandits coming to hunt me I like. What occured after they turned up was a mood killer
The final straw for me was when I snuck up behind someone while they were in bed (a woman actually). I hit her with my best attack and she just got up and killed me in two hits. Game then reloads my autosave just before I hit her. She's laying in bed like she should be but obviously some [censored] has broken reset rule number one which is 'thout shall remember to set all variables back to default'. They obviously haven't because a woman that had been sleeping immediately attacks me because her alert state had obviously carried over from the previous play through.
This kind of [censored] isn't acceptable when you're building on a game like Oblivion, you have a huge team, massively development time and you charge me £50 pound for the game
edit: Guys seriously. Try going around and killing anyone in the game. It seems like you can only kill 10% of anyone you meet who is human. On the flipside a dragon can appear and kill everyone in a town, invincible NPC's included. So a dragon can kill people but I can't?
Couple of final points on this. It seems that you are either low level sneak and [censored], or high level sneak and literally invisible. This is not stealth. Why not have the option at the start of the game to not only choose a race but also a rough class type? You know the usual warrior, thief, mage archetypes. Then alter stats depending on what I chooce. Go warrior? Boost to damage output. Go mage? Magicka starts higher and so do the schools of magic stats. Go thief? Sneak, lock picking and whatnot go up to a resaoble level but damage and magic drop down. It seems if I go thief I have to play as a warrior and slog it until I'm good enough. Meanwhile warriors can just hammer through.
Final point is some simple things. What good are Khajit? Their race description says they can see in the dark and are quick and agile. And yet they can only see in the dark for 30 seconds a day and are no more quick or agile than anyone else in the game, including [censored] old ladies. Wouldn't it have made sense to increase carry weight for orcs? Increase speed and jump height for Khajit? Complete laziness on the design side. Not good enough