Oblivion is a pretty flat game world where you can see forever, therefore they had to seperate the cities. Morrowind was a very mountainous landscape which limited view distance (together with the fog) and so everything didn't have to be rendered at once. Skyrim is probably also going to be mountainous with 'fog' and so I think that most of the cities will be open. Just look at the city screenshot, the area is surrounded by view limiting cliffs.
I think they said they have a very long draw distance but they could still avoid this problem by putting the major cities fairly large apart and using low-quality models until you get close enough to notice.
Occlusion culling. They started implementing it in Fallout 3, and they probably have a better version of it in Skyrim. Just because Morrowind was mountainous wasn't the reason it didn't have to "render everything". It would still render everything behind the mountains to the GPU. The reason Morrowind was able to be "open" was because the camera clipped everything fairly close to the player, which is why the game is so foggy, to hide the clipping. So it didn't render everything on the other side of mountains not because of the mountains, but because of the far clip of the camera. Geometry behind other geometry doesn't automatically get culled by GPUs. Though specific cards have Z-culling features, but they don't work for many games.
And I don't know how you can, but I can't see "forever" in Oblivion. It's quite hilly and forested. If they would have had proper occlusion culling, the game wouldn't have performed so badly. Even if you're looking directly at a wall, everything behind that wall is being rendered in the Oblivion engine. It seems silly and unintuitive, but that's how GPUs work if you don't have some form of culling to prevent this.
Dragonbone is partially right, but even if you have everything at the lowest LOD, if you're in one corner of the world looking at the rest of the world, all those low-LOD objects are still going to add up without proper culling.