I'm using Moodle 2.0 with a variation of John St "Simple Space" theme. The question directly relates to this theme, but in reality the answer could come from anyone using any theme.
When a teacher adds a url to their course and selects "embed" as the display option, the theme assigns the embed object a style that gives it a display height of 0px (thereby making the embed invisible). FWIW, different themes assign different heights to this style.
I've poured over the various style sheets and can't, for the life of me, find where this style is coming from! I'm hoping someone can help.