The upgrade option is usually cheaper and is best when you will not be doing a clean install. However, as you mentioned that you are doing a clean install and the OEM version is cheaper, I would go with the OEM. However, the OEM version does not come with technical support from Microsoft.
The OEM version is for system builders, so in order to get full support from Microsoft for your Windows 7, you'll want to purchase a retail version and since you are running Vista, you can purchase the upgrade version.
And, yes, you are able to wipe your system to install Windows 7 from the upgrade disk.