>How does this prediction jibe with the statement that a larger sensor will always be beneficial, especially in low light?
Even though larger sensors will be beneficial, at some point the small sensor will be good enoug for 99% of consumers, though professionals will still prefer the larger sensor.
>Will smartphones be able to include much larger sensors in the future?
Perhaps, like Nokia pureview did - however that phone is slightly larger than the average smartphone.
>Is there some new physics that obviates the need for a large sensor?
No, but technology will advance so that small sensors will be sufficiently good to 99% of consumers. There's progress in sensor technology ever year. There's also progress on the processor side, which has been/is apparently a bottleneck, as new processors in DSLR cameras enable better image quality (take for example DIGIC processors).
Will smartphones be able to include much larger sensors in the future?
Is there some new physics that obviates the need for a large sensor?
The 5D Mark III has > 24x the sensor area of an iPhone 5, and most smartphones are even worse off [0] [1]
[0] http://en.wikipedia.org/wiki/List_of_large_sensor_interchang... [1] http://www.chipworks.com/blog/recentteardowns/2012/09/21/app...