Tuesday's declaration by a congress of some 2,000 eastern political and tribal leaders in Benghazi, Libya's second largest city and the crucible of the eight-month uprising against Gadhafi in 2011, is a potentially serious blow to the shaky and fractious National Transitional Council, Libya's interim government based in Tripoli in the west.
The gathering declared Ahmad al-Zubair al-Senussi, a member of the NTC, as head of the governing council of a region that encompasses all of Libya from the Gulf of Sidra to the Egyptian border.
He is a great-nephew of Libya's last monarch, King Idris, overthrown by Gadhafi in September 1969.
The defiance of the eastern elders, six months after Gadhafi was overthrown and killed, graphically underlined the traditional rivalry between their long-restive region and the western half of the country, a fissure that deepened during the Gadhafi era.
Events in Cyrenaica reflect a growing demand for federalism in a major African oil producer with reserves of 46.4 billion barrels of oil, the largest on the continent, and 55 trillion cubic feet of gas.
Cyrenaica contains the country's two biggest oil fields, Mesala and Saraya.
"Regardless of what plan is eventually adopted, it is increasingly likely that a strong central authority will not exist in the future Libyan governing system," the U.S. global security consultancy Stratfor observed.
"A power a struggle over the amount of authority possessed by the country's respective autonomous regions will ensue."
That will be bad news for Libya's oil industry, which is struggling to recover from the ravages of eight months of conflict.
If Cyrenaica does break away with most of Libya's oil reserves and infrastructure, the rest of the country will be left with little economic base.
It's not clear whether existing contracts between international oil companies with a central government in Tripoli would remain intact or have to be renegotiated, a process that could well disrupt production and exports.
The Cyrenaica challenge to the authority of the internationally recognized NTC came only a few weeks after local tribesmen took control of the central town of Bani Walid, population 150,000, by wresting it from pro-NTC forces Jan. 23.
That followed similar incidents in the western city of Misurata, which has long existed as a de facto city-state of its own, and the mountain city of Zintan.
The NTC claims it has regained control of these towns, although that remains questionable.
Sentiment for self-rule in the post-revolution turbulence is undermining the NTC's increasingly tenuous claim to be the sole legitimate representative of Libya's 6 million people.
Tripoli itself is controlled by a mixed bag of revolutionary militias who refuse to be integrated into a nascent national army that has yet to emerge.
Any move that jeopardizes the NTC's control of Libya's oil and natural gas wealth would undercut its fragile authority and threaten stability that could damage energy production at a critical time.
The United States and the European Union have tightened sanctions on Iran by seeking to throttle its vital oil exports, to force it to abandon its contentious nuclear program.
Tehran has threatened to close the chokepoint Strait of Hormuz, the only way in and out of the Persian Gulf and the conduit for more than one-fifth of the world's oil supplies and much of its natural gas.
Political upheaval in South Sudan, Yemen and Syria has cut some 1.2 million barrels per day from the global oil supply. Further disruption in Libya will increase market jitters.
The Oil Ministry said Feb. 27 that Libya has been able to restore production of 1.4 million barrels a day and is expected to reach the pre-revolution level of 1.6 million bpd by June or July.
It also said natural gas production has increased from 2.2 billion cubic feet a day in January to 2.3 bcf.
However, difficulties remain. Sources at Libya's state-owned National Oil Corp. say no date has been set for restarting the country's largest refinery at Ras Lanuf. It processes 220,000 barrels per day and accounts for more than half of Libya's refining capacity.