It works by increasing the oil content of soap, which is basically a fatty acid salt. Olive oil is high in Oleic acid and has very good insecticidal properties. I must say though that the recipe you are using is a much heavier concentration than normally used. Most recommend a full TBS of soap and a full TBS of olive oil to 1 GALLON of water. I would be wary that that amount of soap and oil concentration might harm the plants along with the bugs.
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