Effect of higher oil prices on the economy?

[wevets]

If this is a Great Debate instead of a General Question, my apologies to manhattan and Chronos in advance.

It seems to me that if oil prices remain at their current relatively high level, one of the major effects will be to increase prices of just about anything that requires fuel or energy to make. We'll then have increased inflation, which the Fed will respond to by raising interest rates. The end result could be a big change in the pattern of economic growth and prosperity we've seen over the past few years from the direct and indirect effects of higher oil prices.

Is this likely to happen? Are there some alternatives?

[Feynn]

Our Provincial and Federal government are raking in the dollars due to the increase in prices. Alberta is a major oil producer so their revenues have skyrocketed and they also collect fuel taxes. The Feds collect taxes on fuel and just announced a huge budget surplus. They are rolling in extra money and the Feds are using this money to pay down the debt (it's the law). This will save millions in interest charges.

The cost of driving has increased as has the cost of transporting goods. This will eventually be paid by us, the consumers.

On the other hand, jobs are plentiful where we live and we have the lowest unemplyment in the country due to our oil and gas industries. Their good fortune spins off to other areas as they need support and services themselves. Aside from the 71 cents a litre we pay at the pumps things are going pretty well and I have not yet noticed a significant increase in prices.