Just as in mythology, an oracle was a source of truth, an oracle in the blockchain is a trusted third party that connects events and autonomous blockchain agents. By allowing for oracles to exist in blockchain environments it becomes possible to connect smart contracts with events that happen outside of the blockchain!
The Ethereum network does not know how many Dollars / Yen / Euro 1 Ethereum is worth. With automatically sourced data feeds, in the form of an oracle, it becomes possible to introduce traditional markets into blockchain environments and allow for networks to appropriately price things. One immediate application of this is in Binary Options Markets; how does a contract know that at exactly 3:15pm on Monday Gold will be trading below $1,750? It can be told by a random independent self-interest actor OR it can be updated autonomously.