With fuel prices set by the government monthly, Israeli drivers have yet to feel the pinch from higher oil prices due to the war in Iran and the closure of the Strait of Hormuz. But consumers here may not be waiting long before the effect of higher energy prices on a wide range of goods and services starts to hit them in the wallet.

According to experts, the main costs of the conflict will stem from direct spending tied to the war, including paying for munitions, damage to the home front and ongoing restrictions on businesses throttling economic activity. Yet Israelis will also start to see higher prices on food and could also face an economic slowdown as knock-on effects of the energy crisis begin to bite.

“If the world economy is hit by another energy crisis, this is going to affect Israel, because we are a part of the world economy so we’re going to have to be also carrying some of the cost,” said Prof. Benjamin Bental, who heads the Economics Policy Program at the Taub Center for Social Policy Studies, a public policy research institute. “Right now, the energy story in Israel is of some concern, but relatively speaking, secondary.”

Since being attacked by the United States and Israel more than two weeks ago, Iran has been regularly hitting Israel, US bases, and its Gulf Arab neighbors’ energy infrastructure and other key infrastructure targets with drones and missiles.

It has also effectively stopped shipping traffic in the Strait of Hormuz, a key artery for the world’s oil supply, giving rise to fears of a global energy crisis.

Concerns over supply disruptions have pushed Brent crude oil to as high as about $120 a barrel since the start of the Iran war, and despite efforts to calm worries, trading has stubbornly kept the price at over $100 this week.

“While high energy prices are the main effect for most of the countries not directly involved in the Iran war, for Israel, it is of second order, because the main impact is the direct cost of the ongoing fighting,” Esteban Klor, a professor of Economics at the Hebrew University, told The Times of Israel.

Still, the effective closure of the strait to commercial shipping could be ultimately felt in people’s everyday lives for weeks and months, and send household bills spiraling, according to Klor.

Most obviously, the immediate economic pain of surging oil prices is set to be felt by consumers at the pump as gasoline prices climb. Diesel and jet fuel are made from crude oil, keeping cars, buses, delivery trucks, ships, and airplanes running.

However, higher gasoline prices alone do not capture the full economic significance.

Higher energy prices have a ripple effect on fueling costs for a wide range of products, since most goods, including food, and most services are made and transported using oil or natural gas.

“The production process of every Israeli company uses gas and fuel as input to produce goods and services,” said Klor. “If the price of these inputs increases, then that is transmitted to the price of the products that the consumer will ultimately buy from these firms.”

“The first and main impact of that will be an increase in inflation for the Israeli economy and the cost of living for Israelis,” he added.

Israel was already the fourth most expensive developed country to live in, according to the Organization for Economic Co-operation and Development’s cost of living comparison.

Prices of goods and services in Israel are about 29% higher than the OECD average, a 2025 State of the Nation Report from the Taub Center found.

Many essential items Israel imports, such as fertilizers, metals, and grains, including wheat and corn, that are used by food and beverage makers in the production of everyday goods and services, will likely become more expensive.

Higher energy costs through transportation, manufacturing and food production systems will translate into rising food costs.

“We are going to see higher food prices because everything we import has to be transported to the country and for everything that is produced in the country, utility costs will be going up,” said Klor.

When it comes to the food sector, prices in Israel are about 51% higher compared to EU member countries and 37% higher than among OECD countries, according to Israel’s state comptroller.

More than food will become pricier due to the war.

Klor, a senior researcher at Israel’s Institute for National Security Studies, said sectors that rely on transportation and logistics, such as airlines and tourism, as well as agriculture and construction, were also liable to feel the effects of the energy crunch. Sectors that will be less affected are tech services and digital exports, he added.

However, the ripples of the war will be felt across the economy, boosting inflationary pressures.

“We will see a rise in inflation, and that’s going to hurt Israeli consumers’ purchasing power, because salaries are not going to adjust immediately to higher prices,” said Klor. “The purchasing power of our salaries will go down, and it may be more difficult to get salary increases, because firms will also be suffering, and we might even see job cuts.”

“As a result, we are going to see a reduction in the standard of living of the Israeli consumer, which we will also see from the main effect of the ongoing war,” Klor remarked.

Mizrahi Tefahot Bank chief markets economist Ronen Menachem noted that consumers would bear the higher costs of transportation and production, which could spark an economic downturn.

“Soaring oil prices are causing double damage: erosion of the disposable income of households and a decline in consumer demand for goods as the cost of production increases,” said Menachem. “If manufacturing and consumer spending are affected, economic activity will eventually moderate and tax revenues will fall.”

The prospect of lower tax revenues due to global energy shocks comes as Israel is facing a huge economic burden and ballooning financing costs in light of the tens of billions of shekels in military expenses and other costs incurred weekly by the Iran war.

“In addition to defense spending and damages suffered from missile attacks, we are talking about the cost of stopping part of the economy, as several sectors and areas in the country can’t produce, either because employees can’t come to work as the education system remains shut, or as employees are on reserve duty defending the country,” said Klor. “If economic activity slows down because of higher prices, that will also further lower tax revenues, at a time when every shekel counts as the government will be running higher deficits and borrowing expenses to finance the war, which will need to be paid back.”

The expert warned that how the war ends could end up having a decisive effect on how the country’s economy weathers the aftermath. Achieving its goals could translate into a new integrated Middle East and a rejuvenated economy bursting with consumer confidence.

But should the ayatollah regime remain in place and the country face the prospect of more war, Israel could find itself in an economic malaise akin to that of the 1970s.

“If the Iran war ends with regime change and we succeed in removing Israel’s biggest threat, it will be positive for the country’s economy,” said Klor. “But if not, and uncertainty remains, that could be the harbinger of a lost decade for the Israeli economy, and throw us back to what happened in Israel after the Yom Kippur War” in 1973.

Agencies contributed to this report.

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