We all know that gasoline is at $4 a gallon and oil is at $135 a barrel. But if you think that's the end of the story, don't talk to economist Jeffrey Rubin of CIBC World Markets. By Rubin's reckoning, we've barely passed the halfway point on a steady march upward that will take gasoline to $7 a gallon and oil to $225 by 2012. Though there will be fluctuations, the underlying rise in prices, he says, will have pervasive and often surprising side effects. Among them:

• U.S. manufacturers benefit, because rising ocean-freight costs—reflecting fuel prices—make imports more expensive. Some production returns to the United States, and some shifts from Asia to closer exporters (Mexico over China). Since 2000, estimates Rubin, the cost of shipping a 40-foot container from East Asia has gone from $3,000 to $8,000. With oil at $200 a barrel, the shipping cost would be $15,000. Already, he says, China's steel exports to the United States are falling while U.S. production is rising.

• Inflation becomes more stubborn and harder to control. For years, the Federal Reserve has focused on so-called core inflation—prices minus energy and food. The justification for ignoring food and energy is that large price changes usually reverse themselves. But if oil and food prices move steadily higher, that logic collapses. "While core inflation may be barely over 2 percent, that's only of solace if you don't eat or drive," Rubin says. Overall inflation is twice that (about 4 percent) and "won't be coming down any time soon."

• Two distressed industries—home building and autos—suffer further. "In two years, there will be fewer Americans driving," he says. Higher gasoline prices push people to mass transit, bicycles and their feet. Home prices take another hit, especially in distant suburbs with long commutes. "People won't be able to afford what they used to afford," he says.

Do not underestimate oil's fallout. As a practical matter, the world may have arrived at Peak Oil: that condition when dwindling oil reserves no longer permit much, if any, annual increase in production. This may not be literally true; estimates of vast undiscovered oil reservoirs imply that Peak Oil is decades away. But governments that control 75 percent or more of known oil reserves are behaving as if Peak Oil is already here. They're hoarding a scarce commodity by limiting new exploration projects. Meanwhile, production at some old fields is dropping rapidly. Spare capacity has been depleted, as demand outruns new supply.

High prices close the gap. The grim price outlook by Rubin and others presumes that this situation persists. Of course, they could be wrong if higher prices cause demand to drop sharply and supplies increase unexpectedly (might Iraq surprise with large gains?). In the United States, prices have already led to less driving. In March—the latest month available—highway travel was down 4.3 percent from a year earlier. Buying patterns for vehicles have shifted. Through May, car and light-vehicle sales dropped 8.4 percent from a year earlier, and most of the decline reflected SUVs (down 31 percent) and pickups (21 percent), reports wardsauto.com. Oil demand is also stagnating in Europe and Japan.