IMV by "demand rationing" they really mean "demand destruction", which can be brought about by high prices, recession, or actual rationing.

And whether there is misallocation of resources or not is in the eye of the beholder. If someone in the Titanic had known future events several days in advance, he would have probably built a raft out of the furniture in his room. An unaware passenger would have viewed that course of action as a gross misallocation of resources (until sink day, i.e.).

Regarding this issue, I've submitted the following comment to Paul Krugman's latest blog post "The Rogoff doctrine" (no idea whether PK will filter it out). Probably it's just waste of time, but I've also posted similar comments lately to other economics blogs (such as comments #5 and #67 here), out of a feeling that most Hubbert's Peak-aware voices are just preaching to the choir.

Professor Krugman,

As you said, just bringing the relative price of the limited resource to “trend” is definitely not enough reason for reducing employment of labor and capital. The real reason is that oil is limited not only in the sense that its global extraction rate cannot rise as desired (hydroelectric power is also limited in that sense), but also in the sense that it is exhaustible, which implies that its global extraction rate will inevitably peak (most likely in the 2008-2013 timeframe) and relentlessly decline thereafter. Same for natural gas and coal (and high-grade mineral ores too). This fact, when viewed in conjunction with the essential roles fossil fuels play in modern society (as both energy sources and raw materials), leads to the conclusion that the only safe path forward ("safe" meaning minimizing the likelihood of catastrophic societal collapse) is to reserve fossil fuels for essential uses and start a massive program for implementing renewable energy sources (not corn ethanol!).

This approach was stated by M. King Hubbert in his 1976 paper "Exponential growth as a transient phenomenon in human history": "It appears therefore that one of the foremost problems confronting humanity today is how to make the transition from the precarious state that we are now in (based on the use of fossil fuels) to this optimum future state (based on the use of renewable energy sources) by a least catastrophic progression. Our principal impediments at present are neither lack of energy or material resources nor of essential physical and biological knowledge. Our principal constraints are cultural. During the last two centuries we have known nothing but exponential growth and in parallel we have evolved what amounts to an exponential-growth culture, a culture so heavily dependent upon the continuance of exponential growth for its stability that it is incapable of reckoning with problems of nongrowth."

Thirty years later, however, the world does face physical constraints: as shown in a recent article by David Cohen, one of the sharpest Hubbert's Peak-aware analysts, today a wind farm construction plan of the scale recently proposed by Al Gore is simply unfeasible because of PHYSICAL constraints, those of steel production being the foremost. Should we then keep wasting time and directing those resources to further construction of suburban McMansions?

And there is a simple model for the current situation: the case of Easter Island, majority view (i.e. not that of Professor Terry Hunt, who thinks that deforestation was caused mainly by rats and not human activity). And an important difference to keep in mind is that in Easter Island they had the chance to restrain tree cutting to match the reforestation rate, whereas now we don't have that possibility with fossil fuels.

Taxation is the main form of demand rationing. Europe's policy of demand rationing has been, arguably, very successful. Compared to the US, europeans make do with half the energy slaves.