Libya is currently facing arguably its biggest challenge since the end of the 2011 conflict.

It is not the recent wave of assassinations , the series of resignations from the interim government or the approval of the political isolation law, but rather the alarming and now sustained decline in oil production.

Only a few months ago all seemed to be going so well. In April, the state-owned National Oil Corporation (NOC), which manages Libya's energy sector, reported that production was up to around 1.5 million barrels per day (bpd), not far off pre-war levels.

The country's total output in 2012 had bounced back to around 86% of what it was in 2010, recovering from the 2011 conflict much quicker than many had expected.

Crude sales prices were above the Ministry of Finance's already quite ambitious estimate of $90 per barrel, on which it based the 2012 state budget, and money was flowing into government coffers - even if it wasn't always being spent.

But over the past three months a wave of strikes, sit-ins, protests and security problems have conspired to drag down output massively.

Alarm bells rang in mid-June when the NOC said that Libya was now pumping less than one million bpd because of strikes at the Zueitina and Hariqa terminals, in the north-east, and at major fields in the south-west of the country.

At the time this seemed as if it might be a temporary blip, but instead the strikes became contagious.

As of mid-August, key oil ports at Es Sider, Ras Lanuf, Zueitina and Hariqa were not functioning, while output at major producers such as the Arabian Gulf Oil Company (AGOCO) and Waha Oil has been decimated either by labour action or because storage facilities at the terminals are already full, meaning there is nowhere to put the oil once it has been pumped. 

Just before last week's Eid holiday, the oil ministry said output stood at 700,000 bpd - less than half its April level - and since then is likely to have dropped some way further.

The NOC has stopped publishing any detailed figures on how much oil is being produced or exported, and, according to a recent report by Reuters, is unable to even set next month's loading schedules for shipments because the disruption is so bad.

The various sit-ins and protests do not appear to be driven by any organised nationwide movement with a strong political or ideological purpose, but tend instead to be localised disputes, often in remote areas of the country where the authority of the interim government is tenuous at best.

In some cases, fields or terminals have been shut down as a result of strikes by security guards, in others they are related to local groups demanding more government jobs or investment in a particular area, while in others still the labour action has been prompted by demands for management changes.

There also seems to be confusion and conflict over the role of the Petroleum Facilities Guard (PFG), a body affiliated to the interior ministry and set up after the revolution to protect Libya's oil fields and infrastructure.

Wars of words have even broken out over allegations that oil exports from the Es Sider terminal were not being measured properly and were open to corruption, something denied by the NOC.

In other cases localised grievances have caused problems. In late July, for example, Amazigh activists threatened to cut off a pipeline in Nalut that feeds the Mellitah oil and gas facility, on the coast near Zuwara, unless the national assembly gave greater political and cultural recognition to Libya's Berber minority.

The net result of this cacophony of unrest is that state revenues, which rely almost totally on oil exports, are already likely to be well short of the LD67bn ($54bn) budget approved for this year.

Potentially that is not a problem. Libya has no sovereign debt, and is sitting on enviable stockpiles of cash. The Central Bank held some LD128bn ($102bn) in reserves at the end of May, while total bank assets were in excess of LD84bn ($67bn) at the end of March.

But most of this cash is doing nothing. One Libyan banker and businessman recently interviewed by The Libya Report reckoned the velocity of money - one measure of financial and economic activity - was "less than one" in Libya, essentially meaning that funds are lying almost completely idle.

If this level of disruption to crude production is the new norm, and if Libya is ever to ease oil's grip over its economy over the longer term, then those reserves need to be liberated and set to work. 

For now, the risk is of a vicious circle in which labour action at oil facilities means lower state revenues, which means slow progress on improving public services, which in turn triggers more popular unrest and more disruption to oil production. 

As oil and gas minister Abdelbari al-Arusi and Prime Minister Ali Zeidan have repeatedly taken pains to point out when urging protesters or strikers to return to work and consider their national responsibility, lower oil output affects everyone in the country.

But while the interim government requires oil revenue to buy stability and time to manage the political transition and write a new constitution, it does not wield enough hard power to impose production by force. Navigating that unenviable dilemma will be crucial not only for restoring crude output, but also for improving the overall political and security situation in the country.