It would be a lot of work - even if you managed to make it the right shape - and you cannot leave the wood unfinished, the yarn will catch on the microfibers. They would need finishing with somehing that leaves a semi-gloss finish with the same drag co-efficient as the plastic pegs. Also, depending on the way the pegs snap into place, a wooden peg might have to be several hundredths of an inch smaller.
I could do it, but I would not use a Dremel - even though I have three of them - they are not really suitable for this. I would make them on a $3000 copy lathe I have and that way could make multiples all the same size.
In reality however - I would never do it, unless I became desperate, the time spent setting up the equipment and experimenting with finishes would far outweigh the small cost of buying them on eBay, crags list, etc.