Actually, it's based of Fallout 3's difficulty settings, not Oblivion's. In Skyrim/FO3, once you enter a dungeon/area, it's locked to whatever level you were at, so if you enter and decide to leave, when you come back (say 5 levels later), everything inside will still be level 1, but you are now stronger.
In Oblivion, everything was locked to whatever level you were. So if you were low level, all the loot was crap, if you were high level, all the loot was god like.
I have no problems with the game right now, but could it be better? Sure.
Thank god for mods, right?
Realism mod
Project Beauty
Realistic lighting
Better UI
Custom Soundtrack
That's all I need for my Skyrim mods, which will be out by the end of the year no doubt.