I have had Oblivion since it came out in 2006. I have played the game with full detail no problem.

I have since upgraded my pc several times and while I still have the same CPU, I have a better Graphic card and way more memory. I installed Oblivion today and started up, and the game said it didnt recognise my hardware and will set the detail to medium. The graphics underground were ok, though not perfect even with all details to max in settings. Got outside and the view of the riverbank on the other side looks terrible. I installed the 1.2 patch and now I have purple tiling for grass though everything else looks ok.

My PC spec is...

AMD X2 6000 at 3 ghz
8 Gig ddr2 ram
Nvidia 260GTX
160, 320 1TB HDD's
Windows 7 premium 64Bit
Direct X 11

All drivers are upto date

Try renaming or deleting the oblivion.ini file (...\My Documents\My Games\Oblivion\Oblivion.ini)

Oblivion will then redetect hardware. It will also, probably, not recognize your video card and set everything to medium. Just change the settings according to what you think your card will support (You can always change them later). Don't forget your changes won't be saved unless you exit the game (without a crash) or force an .ini save (console command "saveini")

For the second problem, reinstall your shaders: Oblivion Shaders: http://www.tesnexus.com/downloads/file.php?id=20348

You should actually run the OblivionLauncher.exe and manually set it to Very High so the proper shader package will be chosen. Otherwise what Qwaxalot said is spot on.