SHOOT: TheOilDrum.com explains here how this works and why. Good post.
A lot of people think peak oil is no longer a problem because prices are no longer in the stratosphere. It seems to me that standard economic models start breaking down when production for a commodity like oil starts becoming difficult to expand and there are no good substitutes. We have been taught:
As long as production of oil can be expanded easily, relationship (1) holds. But once oil production can no longer be easily expanded, the relationship doesn't work. Relationship (2) would work, if there were a good, cheap, easily expanded substitute for oil, but there really isn't, so it doesn't hold either.
When these relationships don't hold, there are several other relationships that become more important. It seems to me that these relationships help explain our current price situation.
Once the price of oil started going up, one type of feedback loop looked like this:
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