Simply put, leveling problem means that in vanilla Oblivion, your player character gets weaker over time as you level up. This happens due to unoptimal level ups. Because of this, the hostile NPCs in the world get stronger than the player character.

There are a few ways to fix this problem, and the choice is yours.

• Just Don't level up! Ever. -- Not recommended! (Some quest require that you have reached certain level and it's not very fun.)
  
• Plan your each level up in advance! -- Not recommended because it's not fun!
  
• Just fix the broken leveling system with mods! -- The best way to fix it. It's very easy, too! Just install a mod and it just works!

You can read more about the leveling problem itself at the UESP wiki [en.uesp.net] In case you didn't know, UESP is the go-to resource and wiki about all Elder Scrolls games.

In this section I briefly talk about mods that fix the leveling problem.

Pick any of these mods (but you can only pick one!).

1. Realistic Leveling[www.nexusmods.com]
   
2. Galerion Natural Leveling[www.nexusmods.com]
   
3. Oblivion XP[www.nexusmods.com]
   
4. Ultimate Leveling[www.nexusmods.com] -- can be configured to work like Oblivion XP or Realistic Leveling
   
5. All +5 Attribute Modifiers[www.nexusmods.com] -- this is the simplest one but it can make your character over powered!

Here is a simple guide for installing mods for Oblivion (and other Bethesda games). Remember that you can't uninstall or disable mods once you have started the game with them installed. This limitation affects all Bethesda games. There is no "clean save" or any other method to avoid this. The only way to successfully uninstall a mod, is to revert to an old save from the time before you added the mod.

• Download the mod that you are interested in. I recommend Ultimate Leveling
  
• You need a program that can extract the compressed archive. I recommend 7-Zip [7-zip.org] because it's free and easy to use. Download the 64-bit (aka x64) version.
  
• Extract the mod archive (usually .zip file) to a temporary folder.
  
• copy or drag & drop the mod files to Oblivion's data folder (usually C:\Program Files (x86)\Steam\steamapps\common\Oblivion\Data )
  
• The data folder should contain .esp and .esm files and bunch of other folders.
  
• At this point, you can use Xedit [github.com] to clean vanilla Oblivion .esp & .esm files but this step is not required.
  
• Download the Wrye Bash [www.nexusmods.com] (important!)
  
• Open it and select Oblivion as your game.
  
• Go to "mods" tab select all plugins (mods)
  
• Find "Bashed Patch" from the mod/plugin list and right click on it. Select "rebuild patch..." and accept default options. You need to repeat this step each time you install a new mod.
  
• Once the Bashed patch has been rebuilt, you can quit Wrye Bash.
  
• Download the LOOT [loot.github.io] load order sorter (important!)
  
• Open LOOT and select Oblivion as your game. Click on "Sort Plugins" button. Do not skip this step! You need to do this step each time you install a new mod! The game won't work, if you skip this step
  
• You are done!

You are now ready to actually play the game!

But I highly recommend also installing the Unofficial Oblivion Patch (also install the unofficial patch for DLC and Shivering Islands, too). These unofficial patches fix a ton of game-breaking bugs! You can download it from Nexus Mods [www.nexusmods.com] or AFK Mods [www.afkmods.com]

If you are looking to spice up your second playthrough, I recommend that you try Maskar's Oblivion Overhaul [www.nexusmods.com]

P.S.
You can mirror this guide as long as you provide access to it for free of charge.

Have fun!