Oblivion:Time

Time in Oblivion is measured in several different ways.  Most events are measured based on the elapsed game time (or in-game time), but others are measured based on real time (the passage of time in the real world).  Game time passes faster than real time by a factor of 30 (i.e., 1 minute real time = 30 minutes game time).  This means that, for every two seconds that passes in real time, one minute passes in-game.

The game clock (showing the in-game date and time) can be seen in your Journal on the Map tabs, or on the Active Quest tab.  
The time is measured using a standard 24 hour clock, but the date is based upon Tamriel's calendar.  Game time always pauses when you are in Journal mode or have any other menu open.  Many events in the world of Oblivion are dictated by the time of day:
Sunrise is always at 6am and sunset is always at 8pm (this is particularly important for characters subject to Sun Damage).
Most people in Tamriel have daily schedules.  In particular, merchants, trainers, and other people who offer services only offer services within fixed time periods.
Most items (containers, dungeons, creatures, flora) will change (be reset) after 73 hours (3 days + 1 hour) game time.

There are 12 months in Tamriel's calendar and anywhere between 28 to 31 days in each, as well as seven days in a week. The game begin on the 27th of Last Seed in the year 3E 433. The year will continue to increment as in-game time passes (3E 434, etc.) even though these years do not exist in the timeline of later games.

On the other hand, the durations of magical effects such as spells and potions are measured in real time, not game time (i.e. a detect life spell with a duration of 120 seconds will last 2 minutes real time, rather than game time; this is because a spell lasting two minutes in game time would only last 4 seconds real time – hardly enough time to be effective).  Time spent in menus does not count against effect durations.

Any advanced passage of time (sleeping or waiting) will count against any timed magical effects you have.  For instance, if you cast a spell and then wait for an hour, the spell's effects will be finished by the time you're done waiting.  The same holds true for any spells cast on you.  Sleeping and waiting also replenish all of your vital statistics (Health, Fatigue, and Magicka), and is a good way to heal yourself if you've got no other way to do so.

When fast traveling, game time moves at a normal rate.  The game estimates the time that it would take the player to get from one location to another based on their current movement mode.  So if the player is sneaking, walking, or has their weapon/fists readied, they will arrive more slowly than if they were running or riding a horse.  Fast travel times are also rounded off to some degree, though the exact formula is unknown.  Because of this, it is sometimes faster to travel to a location without using fast travel.  The same rules that apply to timed magical effects and replenishing stats with sleeping and waiting also apply to fast travel, because it is technically a passage of time.

Real time passes continuously while you are in the game. If you bring up the menu to take a break, the game engine's real time counter is still ticking. This includes bringing up the load or save game screen. This becomes important when dealing with the Extended Play glitch, also called the Abomb bug). An easy way around this is to fast travel to a safe spot before pausing the game. This will Autosave the game. You can then reload the Autosaved game when you are ready to resume play.

Tips
Use the Wait key to quickly view the time, day of the week and date.  Press the key again (or select cancel) to go back without actually "waiting".  You can also view date information in the Journal and on the PC, by using the appropriate Console command.

See Also
Calendar: Details of the calendar used in Oblivion.
 : A Console command that can be used to alter the default ratio of game time to real time.