In the energy market Tuesday, crude for August delivery was assaulted by sellers for the second day in a row, plunging more than $6 before edging back slightly to close at $136.04, down $5.33 (3.8%), the biggest loss in nearly 4 months. July reformulated gasoline fell 12 cents, to $3.363/gallon.

Traders responded to the dollar rally, and we’re probably “starting to see some of the fluff come out of the market,” said Phil Flynn, of Alaron Trading.

Flynn cited government projections that oil consumption will drop, adding that, “The market is facing up to the fact that we’re almost halfway through the summer driving season and demand is shrinking.”

The Energy Information Administration’s monthly report projected that U.S. petroleum consumption will shrink by 400,000 barrels a day in 2008, nearly 40% more than EIA’s June projection of a decline of 290,000 barrels.

But the dollar may be key, as it “is perhaps the key prop holding up energy prices, and should it stage a technical rebound, it could spark a rather substantial sell-off in a number of commodity complexes,” wrote Edward Meir, of MF Global (MF).

Meanwhile Texas oilman T. Boone Pickens launched a nationwide media blitz to promote his plan to reduce American dependence on foreign oil, by cutting demand by more than a third in the next two years. Pickens is promoting wind power and natural gas as viable alternatives to spending $700 billion a year for foreign oil. (Full disclosure: Boone is heavily invested in both.)

Source: Crude Plummets Again