Is this LED your hard drive activity light? Oblivion is pretty taxing on your entire computer, not just the video card.
Have you noticed that you can walk from one side of the world to the other and not have to stop and wait for anything to load? That's because it loads the next bit of landscape, monsters, etc on the fly. This on-the-fly loading can definitely cause some lag while the next area is being loaded.
If you were willing to throw down that much, maybe it's time for a Raptor?