But Morrowind was Gamebryo as welL.
But I wander if it's really equivalent: Morrowind 'fogged' out the draw distance, whereas Oblivion showed the entire world from any given point. Techically they're quite different problems, even if they used the same basic engine technology.
But it does beg the question, is the reason Oblivion gave up on flying because of the engine (as Hassat suggested) or because of lazy level design (as I suggested)? Certainly Larian used the engine (memory) excuse to justify the difference between flying (Dragon form) and walking.