Umm properly maintained and tuned diesel engines dont produce visble smoke, just look at any diesel city bus (assuming they are properly maintaining it). Diesel engine exaust is only black when the engine isnt turned and burning all the diesel fuel, instead its only partialy burning it and creating soot, this also wastes a fair amount of fuel (as its not being converted to energy)
I belive the exaust gets vented along the back side of the coning tower, they definatly dont vent it underwater in the maner described. As for the cavitation, thats typical of props of that period (plus they didnt realy model it in game, you look to be cavitating any time the props turn even doing 1 knot)
None of the surface ships use diesel, they are all steam driven with coal fires (think steam locomotive on a much larger scale). The reason why sub's dont is because could you imagine working a steam boiler in one of those cans? Coal produces alot of heavy thick smoke.
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