Games.net has published an interview with Bethesda's Todd Howard, in which the lead designer answers a handful of questions about The Elder Scrolls IV: Oblivion. Check it out:
Q: Similarly, the physics model is amazing. How is Oblivion's physics model more elaborate than, say, Half-Life 2? Can it handle more objects? More complex interactions? How will the physics system influence gameplay and visual immersion?
A: Half-Life 2 is a great way to view it, and that game really set the "use physics benchmark.... We're obviously using Havok, as they did, and we've done some other cool things with it, like arrows sticking in objects and reorienting the weight of things they stick in. I think the big thing we're learning with the physics is that with an RPG, there is soooo much you can do with it, like traps, stealing things, and more. Things like Telekinesis spells, picking up stuff far away and trying to manipulate the environment to throw off the NPCs and such. Paralyzing guys and watching them fall down stairs never gets old.