A comeback by Libya's oil industry may be short-lived as a confrontation between armed groups risks splitting the country three years after the fall of Muammar Gaddafi.

Oil production has risen to 650,000 barrels per day (bpd), five times the level two months ago, in a rare success for the economy at a time when armed groups and two parliaments fight for control of the North African country.

Outgoing Oil Minister Omar Shakmak told Reuters output could rise to 1 million bpd later this year, bringing it close to the 1.4 million bpd Libya pumped until a wave of protests crippled the industry in July 2013.

Such a development would be a crucial boost for Libya's stricken economy, with the central bank forced to use up foreign currency reserves to keep the country running. Yet any targets are subject to factional and tribal conflicts that risk spiraling into civil war.

The recent increase comes after a group of federalist rebels campaigning for regional autonomy implemented a deal to reopen major eastern ports such as Es Sider.

But Libya expert Dirk Vandewalle said federalist rebel leader Ibrahim Jathran might close these ports again, after a rival armed faction from the western city of Misrata took control of the capital Tripoli.

This group has pushed to reinstate Libya's old General National Congress (GNC), refusing to recognize the new House of Representatives. Part of the Misrata forces are backed by the Muslim Brotherhood.

In response, the federalists might opt to exert their power over oil exports and the economy as a whole.

"There is always the possibility that the federalists may take this opportunity to reassert themselves," said Vandewalle, author of the book "History of Modern Libya".

So far, the latest fighting has been away from Libya's oil fields and ports. Yet escalating violence in the eastern city of Benghazi for instance is just 100 km (70 miles) from the Zueitina oil port.

Other disgruntled elements could close pipelines to western fields, cutting off funding to the GNC. Analysts note oil security guards from the same region staged protests before the June elections to block the El Sharara or El Feel fields.

One oil trader said the emergence of two parliaments might also pose legal risks, if the GNC gives orders to the central bank and state oil firm National Oil Corp. The House of Representatives and senior officials have no power in the capital, having left for Tobruk in the east to escape fighting.

"The problems would be if the GNC gives the central bank orders to transfer oil revenues," said the trader. "The legal situation would be unclear to prospective buyers of Libyan oil."

BUDGET DEFICIT

Even if oil exports continue to flow, Libya will still post a historic budget deficit of 70 percent unless output rises to 1.6 million bpd at a price of $100 per barrel, said Husni Bey, who heads one of the of country's largest private conglomerates.

Parliament in June approved a budget worth $49 billion, assuming annual production of 600,000 bpd. But output has lingered around 100,000 bpd.

Libya does not publish oil export figures but needs up to 140,000 bpd of its production for domestic refineries.

Bey said the budget crisis is exacerbated by demands to cover infrastructure damages exceeding 10 billion dinars, after the airport terminal, much of the civilian air fleet and fuel storage tanks were destroyed during more than a month of fighting in Tripoli.

The government needed to use up yet more foreign currency reserves and start issuing Islamic bonds to local banks, he said.

The central bank was not available for comment as most employees have stayed at home for weeks, as in most other ministries. The central bank governor has fled for Malta.

The bank only issued a brief statement to local media saying reserves had improved due to the rise in oil production. It gave no details, after putting reserves last at $109 billion at the end of June, down from around $130 billion in August 2013.

In another drain on reserves, the import bill will go up. Libya needs to import $30 billion worth of food and consumer goods because it has no sizable industries outside oil.

"Most importers' warehouses have been inaccessible for up to six weeks because of the fighting and (other) uncertainties," said Bey.

Prices have gone up as warehouses got looted, resulting in empty shelves in some Tripoli supermarkets. A can of baby milk now costs about 8.57 dinars ($7.03), up from 7 in mid July, a resident said.

With most banks closed for security reasons, hard currency has become hard to get. A dollar buys up to 1.60 dinars on the black market in Tripoli, while the official rate is around 1.25.

Bey estimates private business suffered damage of some 2 billion dinars as factories, cafes and shops got hit, forcing the few foreign firms active in Libya to flee - a blow to government hopes for more public-private partnerships. - Reuters