I was very dissapointed when I learned I could not edit the environment and stuff on the Xbox 360. Is there no way that I can do it on the Xbox, like downloading stuff or buying expansions?
You can download the official expansions, but you cannot legally modify them or the game for XBox 360 or PS3. Even if you could, both consoles lack the ability to handle some of the mods that are out there.
And is the construction set very good in Oblivion for the PC?
In a word: Yes.
Can you create buildings, items and people?
Create as is make something that has not been seen in the game? No. You can add existing building types into the game, modify the stats for items, make lots of new NPCs (some mods add over 1,000) and make your own dungeons out of the available tilesets. You can make quests, set up battles, make your own house/castle/fortress/hideout. There is a
lot you can do with the CS.
If you create too much does it lag?
It depends on what you do and how good your PC is. If you put a lot of light sources in one area, the game will tend to lag a bit. You generally can't have more than 16 NPCs and/or creatures in combat at once (unless you modify the Gameplay setting that controls that, but doing so can lead to problems).
Can you edit the actual ground?
Yes. You can alter the terrain height, change the ground texture, do all sorts of things. You can even create your own world space. To get an idea of what's possible, check out some of the mods on http://tesnexus.com/.