Although individuals did not consciously decide to replace fat with sugar in their diets, the reality is that this policy advisement lead food producers to reduce fat in their products and replace that fat with sugar -- so the practical result was indeed this. Most products that advertise low-fat have accomplished this with sugar. Sure, it didn't have to happen this way, but thats irrelevant because it did happen this way: their was public policy that labeled fat as the bad guy, fat was reduced (sugar increased), and these actions were applauded.

How is that? My understanding is that lipid oxidation promotes insulin resistance itself.

If anything, and under the right dosage, sugar is protective.