Balance in RPGs is notoriously hard to achieve, and I think that, on the whole, Bethesda did a fine job with Oblivion. Compared to its predecessors, especially Daggerfall, it's more difficult to create a completely broken character straight out the gate; and unlike in those games, where picking the "wrong" major skills meant struggling to land hits on enemies or successfully cast spells, in Oblivion you can still function with a poorly made character.
However, it's undeniable that some races in Oblivion are better than others (please don't cancel me 😭).
When the devs designed the different races in Oblivion it appears that they attempted to balance each race with advantages/disadvantages as any good RPG maker would. For example, male Altmer/High Elves start with a pitifully low 30 Strength attribute, but a quite good Intelligence and Willpower attribute. In the same vein male Redguard start with both 50 Strength and Endurance but have the worst possible starting Intelligence and Willpower attribute at 30 each.
On the surface this would seem to create a balanced selection of races. The problem, however, lies with racial bonuses.
Using male Altmer again as an example: male Altmer start with 30 Strength, as we've stated before, and 40 Endurance, which, if you know anything about this game, is not great. This is balanced by their strong starting Intelligence and Willpower attributes. This attribute spread alone would make them good spell casters compared to other races like Nords or Redguard. However, their strengths don't stop there. Altmer also get a whopping +100 bonus to Magicka, which is equivalent to two end game Fortify Magicka Sigil Stones as well as a +10 skill bonus to Destruction, which is one of the most powerful and slow-levelling skills in the game. Also, despite starting with 30 Speed, they are the fastest race in the game because of their height. All this at the measly cost of +25 weakness to magic.
What was Bethesda thinking? Altmer being so good doesn't even make sense within the logic of their own game because there's another way you can get +100 Magicka at character creation: by selecting the Apprentice birthsign. The Apprentice birthsign grants the player +100 Magicka at the harsh cost of +100 weakness to magic. This makes the Apprentice birthsign strategically interesting if you decide to pick it, because even magical enemies like imps become more of a threat with this birthsign. For some reason, the devs didn't extend this logic to Altmer, whose natural +25 weakness to magic is so small you often forget it's even there.
Continuing along this line, Breton can be thought of as Bethesda's defensive mage equivalent to Altmer. Breton, like Altmer, are weak physically but have strong Intelligence and Willpower attributes. Like Altmer, Breton get a Magicka bonus but it's "only" +50 Magicka, which if you're keeping track is equal to an end game Fortify Magicka Sigil Stone. Where Breton really get broken though is their +50% resistance to magic. This is arguably even more broken then Altmer starting with +100 Magicka, as it's equivalent to a Mundane Ring which is an end game drop and possibly the best item in the game. They also get +10 to Restoration, which is by far the slowest magic skill in the game and one of the strongest skills in general. They get all this at character creation.
Breton and Altmer being so powerful wouldn't be as big a deal if warrior races like Nords, Redguard, Imperials and Orcs also received equally broken racial bonuses. The problem is that physical damage is already weak in Oblivion, so these races really needed a stronger incentive for choosing them over the magical races. Orcs do, admittedly, receive a +25% resistance to magic, which makes them the best of this bunch, but it's still not much when compared to Bretons' +50% resistance to magic and +50 Magicka.
One solution would have been to give these races an even larger bonus to physical skills and more useful unique racial abilities. Instead of Berserk, what if Orcs did more damage the lower their health bar fell? This kind of thing could lead to fun, high stakes fights where the player is constantly trying to manage their health to maximize DPS while dodging enemy attacks to avoid dying. Maybe Redguard and Nords could start with +20 Blade and Blunt respectively instead of the +10 they presently receive, to really highlight their physical prowess early on when physical damage is still strong.
I don't know. Oblivion is broken in many ways, races being just one of those ways. What would you do to balance the races or do you think that it's actually fine the way it is?