I'm used to MW modding, I mod textures for MW all the time, and the question stems from the fact that there is already a "slider" of sorts of different settings for texture sizes in OB but not in MW.

In MW, when you replace a low res texture with a high res texture, it just changes, because there aren't presets. But what happens in Oblivion? Are there high res texture packs for armor and weapons in OB? If you install these, how does it work with the texture size options?

I'm just assuming that, since there is the option of change, modding textures in OB is different than in MW?

Similar, but different if that makes any kind of sense.
Possibly better explained here http://cs.elderscrolls.com/constwiki/index.php/Resources_for_3D_Modeling

I've never really looked into it, but I've always assumed that setting a low texture size simply adjusts the game to use a smaller mipmap from the same texture files. Having looked through a lot of game files, there definitely aren't multiple sets of textures for use depending on your texture setting. Only thing even close to that are the multiple menu folders which are resized versions to prevent GUI items from getting too tiny on-screen when using a high resolution.

That actually confuses me a great deal more than I already am.