What Levelled Lists are

Leveled lists are used to create dynamism in the game world. In general, leveled lists can be used to introduce random chance into events - characters being equipped at random with one of a set of weapons - or they can be used to scale the environment to the player's level - seeing a Rat at level 1 and a Mountain Lion at level 17. Many leveled lists focus on providing one or the other, but they can also be partially random, partially level-based, depending on the way they are set up.- The Elder Scrolls Construction Set Wiki
Leveled lists give Oblivion it's random loot, or what decides what creatures you'll fight in random encounters or even what spells mages are gonna toss at ya. They are also how Oblivion scales the world around you. There are three main types of Leveled Lists. The first is vanilla, which scales the world so low level items and creatures will appear only at the characters low levels and disapear as you progress further. The next type is harder levelling, which is what major overhauls like Oscuro's Oblivion Overhaul or Francesco's Leveled Creatures/Items mod. They make it so theres a low chance of finding strong items and creatures through the entire game at any level. You will be able to encounter say a Daedroth at level one or a scamp at level 30. It is a system similar to The Elder Scrolls III Morrowind. The last main system is Unleveling like the overhaul;s Tamriel Immersion Experience or Waalx Animals and Creatures does. They make it so any item can appear at any level with equal chance.