It's difficult to talk about balance -- the AI is quite bad, at least compared to a good player. But yes, you're expected to use your starting research and fast ob points. NPRs are generated mostly the same way, and they use their points.
In general, I consider using SM mode after the game turns have started moving to be cheating. Prior to that, it's just setup. It can still be cheating in a good way though. Almost any effect of a bug short of repeated crashes can be fixed. SM mode also grants powerful tools for handling lag, like disabling sensors system-wide. If you want something unusual, like enemy ships in every system, you can use SM mode to create that. You can use it to correct stuff, or go outside the mechanics aurora can otherwise handle. Of course, you CAN make yourself invincible. Use it wisely.
In your first games, I suggest leaving SM off after setup, except maybe to correct your most boneheaded errors.
^^That guy^^ provides an example of a bug people are successfully working around right now.