Being an absolute Elder Scrolls nut, having played them religiously since Daggerfall first came out, I believe I am qualified to answer this thread.
Each ES game has it's strengths and weaknesses, and if you were to ask me which one to play, I would say to play them all, as each one offers a different experience altogether. But if one game in particular must be selected, I would choose Oblivion.
While it is true that Oblivion was simplified for the masses, it still offers the rich gameplay experience that the Elder Scrolls is known for. And this is only made richer by mods. Most of what is wrong with the game is fixable with mods. In fact, mods are what keeps me playing the game TO THIS DAY, and I have owned it since I bought the collectors edition on release day.
The dumbed down interface is fixable by using interface mods like BT Mod. These make the interface much cleaner and more PC friendly.
The combat is easily spiced up by using mods like Combat Moves, or Deadly Reflexes. Oblivion was already an improvement over Morrowind, adding power attacks, active blocking and quick casting, but Deadly Reflexes adds decapitations, dismemberment, instant kill finish moves, new stealth kills, and even mounted combat, which was one of the most demanded features.
The dull environment has been improved dramatically by using the Natural Environments mod, which adds more weather and makes the game more atmospheric. The Unique Landscapes Project is a HUGE mod that completely changes the face of the world so no two areas look the same.
One of the most looked-down upon "features" of oblivion was the leveled enemies and loot. All enemies you faced were scaled in such a way that the difficulty remained constant. You could never be thrust into a dangerous situation, completely eliminating any feeling of danger in the game. Mods such as Oscuro's Oblivion Overhaul fixes this, and then goes the extra mile adding whole new features and creatures to the game. Now you have to actually worry that the enemies you face may actually be able to kill you.
I've barely scratched the surface of the mods available. There are mods that changes every texture in the game to a super high-resolution one that requires a video card with 512mb of vram. There are countless quest additions, NPC additions, new towns, dungeons, weapons, armor, even whole new landmasses. Modders really latched on to Morrowind, giving the game a huge amount of options, but with Oblivion, the possibilities are greater, and it seems that modders really outdid Morrowind in terms of player-created content.
Oblivion by itself is good for a couple hundred hours of fun, but with mods, that number is pushed well into the thousands. Not to mention, it seems to be better optimized and more stable than Morrowind could ever hope to be. To this day, Oblivion still runs better on my computer than Morrowind. Though Morrowind runs well on my wife's laptop, which is incapable of running Oblivion.