There's a commodity that exists in limited supplies on the Earth; let's call it awesomite. Awesomite can currently be harvested and brought to market for $5/oz, and at that price we can satisfy all the demand from people who are willing to pay that much. Eventually, some of the supplies of awesomite run out, and it becomes more difficult to meet the market's demand. We can get more awesomite for $7/oz than we can for $5/oz in this now-somewhat-depleted world, since that price would allow us to buy a sweet line of awesomite-carrying trucks which would help us reach sources of awesomite that simply couldn't be harvested without them. And at this higher price, some people decide to stop using awesomite; we can meet all the remaining demand for awesomite at $7/oz. Eventually, we start to deplete the supplies of awesomite even further, and so it becomes increasingly difficult to meet demand at $7/oz. For $10/oz, though, we can definitely get at some of the hardest to reach sources of awesomite, since we could buy a totally rad array of processing equipment that would enable us to get the valuable commodity out of ore that would otherwise be too impure to use. And at $10/oz, way fewer people want to use awesomite, so we can balance things again.
This entire time, we've known about a substitute for awesomite: spiffium. With current harvesting methods, we can get spiffium for $9/oz, but even at that price we can't produce all that much -- the technology is very limited. When awesomite cost $5/oz, people were only really using spiffium for specialized applications; it simply didn't make sense to use it when you could just use the much cheaper awesomite instead. The same was pretty much true at $7/oz. But when awesomite prices hit $10/oz, the spiffium producers went into high gear. They quickly found that they had maxed out the amount of spiffium they could produce, and suddenly people were willing to pay $10/oz for whatever they could put out. Accordingly, a lot of people started to invest in some excellent new methods to produce spiffium.
See, there was always a whole lot of spiffium that could be harvested, but no one ever really cared to figure out how. Developing any one of those new methods would be expensive and may never turn up anything. And besides, the price of awesomite was just so low; the investment would only have been worthwhile if it produced a radical breakthrough that totally revolutionized spiffium production, and that was a pretty big risk to take. But at $10/oz, things looked a lot better for spiffium producers. As awesomite supplies continued to dwindle, its market price continued to climb and awesomite producers continued to use even more remote and awesomite-poor resources to satisfy the market's demand for their products. But at these high prices, spiffium producers could justify radically expanding their own production and investing in all new methods to get spiffium to the marketplace.
As time went on, the spiffium producers had a series of breakthroughs which fundamentally changed the way that spiffium was produced. They could now get way more spiffium out of the ground than they ever could before with cool new pressurized water harvesting systems and computerized geological data processing programs that spiffium company engineers created once the investment dollars started flowing in. And they could do it at lower and lower prices. Soon the price for spiffium started to drop below the price of awesomite, and now it was only the specialized applications that used awesomite; any application that could use both commodities would be hard-pressed to justify using anything but the much cheaper spiffium.
As might be rather obvious, I intended the above story to be an allegory for the growing concern about oil supplies. Oil -- the equivalent of awesomite in our story -- is really cheap right now, and has been for a long time. If you believe some people, it's too cheap! Why? Because at current prices, oil is preventing "needed" investment in alternative sources of energy -- a real-world version of spiffium. And the reason we need to be investing in alternatives is because we're going to run out of oil, and this would be terrible.
But as we saw in the story, when we started running out of awesomite, the price rose and we started using sources of awesomite that would have been uneconomical at lower prices. And eventually, prices rose high enough that it was clearly worthwhile to start investing in alternatives. The price mechanism automatically sent signals to the relevant actors that told them what they should do!
So I really fail to see what is the big deal about "peak oil" and dwindling oil resource supplies. As we start to actually run low on oil, suppliers will be hard pressed to meet market demand with their current resources. Prices will rise, people will cut back, and currently uneconomical oil resources will come into production. When prices rise high enough, alternative fuels will begin to make sense, and we will start to see a transition away from oil in applications where substitutes can be utilized efficiently. It will be just like how people slowly stopped using awesomite and switched to spiffium in our story.
Now, this shouldn't necessarily be taken as an indictment of social funding of alternative energy research; that's an entirely different issue with a whole separate range of considerations. But what I do think this discussion supports is the idea that people should take a few deep breaths and stop getting so worked up about peak oil. It will be okay.