When Ethanol started being used as car fuel in Brazil (in the 70's), there were not life-threatening additives on it, so of course some people would use it to mix with drinks. The practice only stopped in the late 80's when there was a supply crisis and Brazil had to import methanol and the TV started reporting cases of people going blind due to severe methanol poisoning.
Methanol is a biproduct of fermentation, and will be part of the destillate if not done carefully. I doubt that ethanol used in car and torpedo fuel will go through the same quality control than drinking alcohol.
If unsafe for humans amounts of methanol in the product was tolerable for the torpedos they would have just done that to prevent consumption.
The cleanliness and hygiene controls along the way are going to be lesser. It's not like it's being made in a food factory.