Sherlock Holmes once asked, “How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?” Or, more generally, you can reason by elimination: if you cannot deduce the cause of an event directly, you can still zero in on it by eliminating other possible explanations. This is familiar to any parent: if I come back downstairs from the attic and notice that a plate of cookies, there 10 minutes ago, is now empty, and the only other person in the house is my 6-year-old, I can state with absolute confidence that she ate them. I don’t need to catch her in the act, or even follow a trail of crumbs up to her room—the mere fact that there is no other possible perpetrator points inexorably to my young daughter.

It’s the same with identifying the cause of high oil prices—we cannot directly prove whether they are the result of A or B or C, but if we eliminate A, that will leave either B or C. In this case, A is supply and demand—the traditional economic fundamentals that drive pricing; B is speculation; and C is the pricing link between the value of the dollar and the cost of a dollar-denominated commodity, like crude oil. If we eliminate the interplay of consumption, or use of oil, and its supply as the factor propping up oil prices, that will leave speculation and the dollar-oil link.

Eliminating economic fundamentals is easy—they’re currently awful. According to the International Energy Administration, world oil demand in 2009 was 84.9 million barrels per day. That’s substantially below 2008’s 86.2 mbp; more saliently, it was well below ‘08’s supply of 86.4 mpb. (The IEA does not yet have aggregate supply figures for ’09.) Every indicator—literally, every single one—shows that supply exceeded consumption in 2009; that’s why inventories of crude, gasoline, and distillates (the category including heating oil) are all at record levels and continuing to rise. Rising inventories should bring about lower prices—that’s macro economics 101. However, instead, even as inventory accumulates, crude prices per barrel have been holding at $75 or $80.

It doesn’t make sense, not even to very knowledgeable industry veterans, such as the head of French Oil Giant Total SA and financial analyst Jason Schenker, who both believe that prices should be around $60 per barrel, give or take. No, when supply grows, demand stagnates or even shrinks, yet prices still rise, there’s something beyond economic fundamentals driving prices.

So we’ve eliminated A. Now, can we also eliminate C—the link between the value of a dollar and the price of oil? Not entirely, though we can diminish its impact. The dollar’s value was weak for much of 2009, and that certainly helped hold oil prices above a level indicated by the balance of supply and demand. However, lately the dollar has been recovering and that should reduce oil prices. Instead, we’ve been seeing both the price of oil and the value of a dollar rising more-or-less in tandem since November. Some economists even have stated that the historical link between the dollar and oil is weaker than ever.

So, even if we can’t eliminate C—the dollar/oil link—as a factor influencing the price of oil, we can still reduce its importance. That leaves B—speculation—as the factor inflating oil prices.

That’s been the conclusion of many others, such as the CFTC. It’s amply supported by statistical evidence as well, such as a study which shows that as the percentage of investors who are speculators rises, so does the price of oil. More recently—Tuesday—Bloomberg.com published an article showing that “large speculators are behind the current oil rally.” As the chart accompanying the article shows, as large speculators increase their oil futures holdings, oil prices rise. Month by month, prices and financial speculators’ holdings track each other.

Granted, it’s almost impossible to prove from these charts that it’s speculation driving prices and not the other way around—the graphs would look pretty much the same if speculators were chasing high prices. But that’s where the logical exercise that we began with came in: we can eliminate consumption completely as the reason for high prices. We downplay the impact of the dollar. All that’s left is speculative activity. Or consider 2008’s dramatic oil price boom and bust. Over 18 months, prices doubled, fell by three-quarters, then doubled again. Over that time, none of the supply of oil, the consumption of oil, or the value of a dollar experienced—either singly or together—swings of anything like that magnitude. Again, only speculation is left as a significant causal agent.

Even when people try to justify high prices, such as by pointing to anticipation of a global recovery, or the belief that Chinese oil consumption drove up global demand, they’re still talking about speculation—speculation is betting on the future demand or supply of a commodity. Nobody is able to point to a factor that justifies prices at their current level—because there isn’t any. It’s all speculation, top to bottom.

Why is that an issue? When speculators bid up prices now in hopes of making a larger profit later, it’s not just balance sheets, statements, and ledgers that are affected—real people are impacted. When the price of oil rises so hedge fund investors can make more money, average Americans—people who have to work for a living—pay more for food, for heat, to drive their cars…in fact, it’s difficult to find an area of life NOT impacted by energy and fuel prices.

Right now, financial speculation, even excessive speculation, in commodities is legal. But given the evidence—the evidence of how it affects the price of oil, and the everyday evidence of how high oil prices can hurt the economy and taxpayers—the question is, should it be? Is it right to allow comparatively unfettered speculation in an essential commodity like heating oil, on which millions of people rely to survive the winter? Or is it finally time to put sensible limits on oil speculation, to protect everyone who’s not a speculator?

Yesterday’s announcement by the CFTC that they will soon implement position limits on commodities markets is certainly a step in the right direction. But the announcement will undoubtedly spark a fresh round of commentary claiming that speculation has nothing to do with oil prices. And, just like many times before, they will be wrong.