Imagine a game with NO cheats available for the AI
Well, where's the difference with regard to Sid's argument? If a game has an AI that cheats just a little, then (according to Sid) players will assume that it cheats. If a game has an AI that doesn't cheat, then players will assume that it does. Sad, but true.
The AI has obvious cheats in its favor in this game...
Doesn't ruin the fun for me, but I do wish the cheats weren't there...
As said before, the Civ4 AI has remarkably few cheats for a game of such complexity. I fully agree with your second sentence though.
Beyond the aforementioned diplomacy issue, the AI can automatically see your naval units (at a minimum of their move range), having no fog of war... that pretty much breaks the whole naval part of the game...
Yep, that's definitely an annoyance. Soren Johnson explained in a recent Googletech talk why he felt he had to do it this way. The point is that the human player sees an enemy unit going into the fog of war. Based on the direction in which the enemy was moving, and knowledge about his movement range, he can estimate where the enemy might have ended up, and try to follow it. Even if he doesn't find the enemy unit immediately, he can keep in mind that there
was an enemy unit in that area, and search further until he finds it.
The AI in comparison is handicapped in two ways. One, it doesn't "see" in which direction the enemy moves. Second, within the Civ4 framework it cannot be programmed efficiently to hunt a moving target that it cannot see. It's theoretically possible to program an AI that can do this, but it's beyond what contemporary game AIs can manage.
So, to balance the handicap that the AI has in such a situation, Soren decided to enlarge the AI's view distance, so that it doesn't have to "guess" the positions of enemy units as long as they are still within movement range. That's a definite improvement over previous games in the Civ franchise and over many other strategy games (where the AI has no fog of war whatsoever), but - and here I agree with you - it's a cheat. Personally, I think it gave the AI an unfair advantage in naval combat. I understand Soren's reasoning, but I think it would've been better to give the AI a random chance to fail "finding" a unit that it can only see due to this cheat. This would be on par with the human player's ability to make an educated guess as to where an enemy unit might have moved to.