How do you balance encounters? That's a very frequent question from people who try Old-School Essentials or other OSR rulesets and retro-clones coming from more recent RPGs.
A very frequent answer is: you don't. Let players learn when to run.
That's a bit harsh, and not exactly what's in the rules. I took the OSE Rules Tome PDF and checked this stuff for you. The same conclusions may as well apply to most other retro-clones of B/X, BECMI, OD&D and similar early editions, but I'm tackling this with the Old-School Essentials pdf at hand.
As far as the written rules go, this is how it is:
1. The game assumes a group of 6-8 PCs.
That's explicit at page 100 in the Classic Fantasy Rules Tome. Note it also recommends a variety of all classes in the group. A party of 8 without a cleric will have a harder time against the undead, for example.
2. The PCs are supposed to venture into a "dungeon level" equal to their character level (average), if they want a "balanced" adventure. Nevertheless, a level 1 party is absolutely welcome to venture into dungeon level 2, if they want to increase both risk and reward.
3. The Dungeon Encounters tables in the book are based on 1. and 2., and tell you what the group might/should encounter. It is roughly based on HDs (creatures for dungeon level 1 roughly have 1 HD, and so on). Page 139 and 204. Also note this is engrained in the dungeon creation system, page 225, which connects dungeon level with both monster encounters and treasure found.
So there’s that for "balance"!
As you can see, given the wild variance in the roll for the number of monsters encountered, the game doesn't assume fair fights at all! Some will be very easy, some will be a bloodbath.
In the wider OSR scene, this has been described as combat as war, in contrast with the combat as sport that you get in more "balanced" games (from d&d 3.x on, with a refined Challenge Raring system).
Combat as war means it can be deadly, and you can and should avoid it when it's too dangerous, and use all you can to your advantage (terrain, scouting, setting up traps and ambushes, using oil, etc).
So how are PCs supposed to survive this game?
1. Reaction rolls.
2. Morale rolls.
3. Information & consequent player agency.
They may make the difference between a memorable campaign and a frustrating streak of TPKs (which might be memorable too).
Reaction rolls are awesome.
Seriously. Strange alliances in the dungeon are a lot of fun, a great opportunity for role-playing (how do you befriend Gnolls? And a Manticore?) And a Wight?), and introduce a whole new level of strategy to the game. With the exception of (most) constructs and undead, creatures prefer to live, and should only engage in combat when they believe they can and will win, or they feel they have no other choice (and so should players). Even when they believe they can win, monsters may prefer to make pacts and/or try to fool or intimidate the adventurers into doing something for them.
Reaction rolls should also be made (and adapted) for non-sentient beasts such as lions, giant spiders and the ever-threatening, save-or-die venomous snakes. They too want to live, and it is hard to believe they attack everything that comes into sight.
Morale rolls are awesome AND necessary.
They are the only way a 1st level group survives repeated encounters with 4d4 kobolds or 1d10 giant shrews. Copy-pasting from previous paragraph: With the exception of (most) constructs and undead, creatures prefer to live, and should only engage in combat when they believe they can win, or they feel they have no other choice (and so should players). Morale rolls are there to reassess the situation once combat has begun and blood has been spilt.
Information makes the game engaging.
This is not in the rules, but is part of the shared wisdom of the OSR. Adventures, scenarios and sandboxes should always include rumors and clues to inform players about what to expect. Maybe not everything, but definitely some of the threats of your Crypt of Damnation should be known or knowable before getting in there, and some other clues about threats might be available once inside, for smart players, before they run into those threats. Footprints, corpses, that kind of things. The end result should be: allowing players to pick their fights. Again, not all of them, but most.
What if I have 3-4 players?
1. Allow each player to play two characters (hey, even three would be ok!). A game that's as simple as OSE really allows this without much trouble. Plus, if one of your PCs dies, the adventure goes on and you don't have to roll a new character to join the game again! This is the best option, in my view.
2. Use Retainers rules, page 126. That's almost the same as 1. above, you know? To some players it might make a lot of difference, though.
3. Change the number of monsters encountered proportionately, of course. 3-4 PCs means you halve the number of monsters. If you do that, though, you should cut treasure by the same amount! That's if you want to stay true to the "game balance", which connects players' level, risk and reward.
Final Note: Do What You Want
Everything written in this post is how things are in the book. I'm not saying you HAVE to do it like this. I don't always play like this! I'm just saying these are the answers found in the book, and I suggest you give it try before changing things.