Just the spike to $130/bbl in 2006 saw people switching away from SUVs to Priuses in droves. If that were sustained for any length of time, everyone would be driving a plug-in hybrid to work. The technology exists today, and the production capacity would ramp up pretty quickly.
If every switched from a 20mpg car to a 50mpg car where the first 100 miles of each trip was free, it'd more than make up for anticipated oil production declines over the next 50 years.
Those consumers will not be buying plug-in Priuses; and with consumption growing rapidly in the oil exporting countries, once they pass their national production peaks their export rates will decline faster than their own production rates.
1.) They'll substitute more efficient yet more expensive cars for gas guzzlers, as the TCO of a gas guzzler goes up.
2.) Efficient, cheap, yet small cars will start being developed for emerging markets. (This is already happening a bit - consumers in Beijing tend to drive much smaller cars than consumers in Houston.)
3.) They won't buy cars at all.
There's no innate reason beyond price why consumers in developing companies can't buy plug-in hybrids. And if price is the governing factor, they simply won't buy cars as well. Either way, it puts downward pressure on oil demand and hence serves to limit prices.
Neither of these are ever what determine the price. Price is determined by the intersection of what buyers are willing to pay and what sellers are willing to accept in payment.
Now, the cost to produce, as well as the production rate (in relation to the consumption rate at a given price) may well feed into the seller's decision about what they're willing to accept. But that's a second-order effect. Sellers charge what buyers are willing to spend. They'll make more of it if there's a good profit to be made; if nobody will pay very much, they'll invest their money in producing something different.
The price that a buyer is willing to pay is influenced by how important is the goal for which he wants to use the product, but also how readily he use an alternate product in substitution for this primary one.
Thus, he may be willing to forgo the purchase of a vacation trip, because it's just not worth the money.
He might also, in the longer term, substitute different goods. So in a longer time horizon, he might change jobs to one that allows him to telecommute, in order to circumvent gas prices. Or car manufacturers might see that they themselves are having trouble selling gas-guzzlers, and change production to alternate-fueled cars, like electric (whose power is ultimately generated by coal or nuke), or maybe engines fueld by natural gas, or something.
So in the big picture, there are many safety valves allow this pressure to be dissipated.
Yes, it will require a rapid expansion of CTL plants and demand will drop.
It would probably mirror the expansion of South African CTL plants after numerous oil boycotts.