Should the Oscars have a separate SF category? I'm rather of the opinion not, simply because I think giving SF its own category will just diminish the overall quality of the films, since they won't have to compete against films outside their genre (oddly, I do feel that animation desperately needed its own category because it is such a different tech from live action).
As for Avatar? Leaving aside my utter squick for most motion capture, I did not feel the quality of the story itself merited a major category win.