That's true. It actually always baffles me when I hear NPCs in Oblivion say things like "What on Earth...". It doesn't make much sense, and I can't cite a time when an NPC says it, but I assure you they do.
You may want to keep in mind that the word "earth" is a synonym for soil, dirt, ground, and foundation of a world. Thus saying "What
on earth?" is about what is on the earth. That has an entirely different contextual meaning. So no, that's not really baffling.
EDIT: Ninja'd by Xarnac while I was typing about Star Wars. Good examples, btw.
However, I can give you an example like that which truly is baffling - In Star Wars during Return of the Jedi and elsewhere, the 2 legged AT-ST walkers are called "chicken walkers". WTF?! Where is there a chicken in the Star Wars universe???
Aside from Robot Chicken, of course.....