Israel–Iran war strains economies: What happens if Strait of Hormuz shuts down?

As the Israel–Iran conflict enters its second week, the battleground is no longer limited to the skies. Both nations are now locked in a parallel war of numbers, where missile interceptions cost millions, oil exports vanish overnight, and households brace for tax hikes.

For Israel, already burdened by long-running conflicts in Gaza and Lebanon, the question is urgent: Can Tel Aviv’s economy afford another war? For Iran, with its currency in freefall and energy infrastructure under siege, the challenge is one of endurance.

And now, there’s a new risk looming on the horizon: the potential closure of the Strait of Hormuz, one of the world’s most critical energy chokepoints.

Here’s a deep dive into how the war is straining both nations militarily, fiscally, and economically and what could happen if Tehran acts on its threat.

Israel’s most expensive war yet

In the first 48 hours alone, Israel’s confrontation with Iran reportedly cost a staggering 5.5 billion shekels ($1.45 billion), according to Ynet News.

That reportedly amounts to over $700 million per day, and if hostilities continue for a month, the cost could cross $12 billion, surpassing the final bill for the 2023 Gaza war.

Driving these soaring costs are Israel’s advanced defence systems. Each David’s Sling or Arrow-3 missile interception costs anywhere between $700,000 and $4 million, as reported by the Institute for National Security Studies.

The deployment of F-35 fighter jets over Iranian territory adds further strain, with flight operations costing $10,000 per hour per jet, excluding ammunition and logistics.

Israel could reportedly be spending up to $1 billion per day on military operations alone.

Budget pressures and the deficit test

To fund this military mobilisation, Israel has significantly expanded its defence budget, from $17 billion in 2023 to $28 billion in 2024, and a projected $34 billion in 2025. That would amount to nearly 9 per cent of GDP, second only to Ukraine, according to SIPRI.

To finance the surge, the government has increased Value Added Tax (VAT) to 18 per cent, alongside hikes in healthcare and national insurance. However, these measures may fall short.

The Ministry of Finance warns that Israel could breach its 4.9 per cent deficit ceiling (approximately $27.6 billion). Compounding the issue, GDP growth forecasts for 2025 have been slashed, from 4.3 per cent to 3.6 per cent, according to the Israel Central Bureau of Statistics.

Civilian costs add to the burden

The economic impact of the war is being felt far beyond the battlefield. Over 5,000 Israeli civilians have been evacuated due to missile strikes from Iran, with the government footing the bill for temporary accommodation in hotels, as per Israel’s National Public Diplomacy Directorate.

Damage to urban infrastructure is extensive. Engineers quoted by Reuters say restoring just one damaged skyscraper in Tel Aviv could cost tens of millions of dollars.

Meanwhile, day-to-day life remains disrupted: Israel’s main international airport was shut for several days, schools remain closed, and only partial workplace re-openings have been permitted by civil defence authorities.

Tech resilience vs workforce crunch

Israel’s high-tech sector remains a relative bright spot. Contributing 20 per cent of GDP and 64 per cent of national exports, the industry has shown resilience even during wartime.

The Tel Aviv Stock Exchange continues to outperform global peers, reflecting cautious investor confidence.

Yet cracks are emerging. For the first time in a decade, employment in the tech sector declined in 2024, according to the Israel Innovation Authority. Skilled workers are increasingly choosing to relocate abroad, triggering fears of a brain drain.

At the same time, widespread reservist call-ups, the cancellation of Palestinian work permits, and logistical bottlenecks have caused over 60,000 Israeli firms to shut down this year, as reported by CofaceBDI.

What if Iran closes the Strait of Hormuz?

Amid mounting pressure, Iran has repeated its long-standing threat: to close the Strait of Hormuz. This narrow waterway, just 33 kilometres wide, is the world’s most critical oil transit chokepoint.

Every day, around 21 million barrels of crude oil and over one-third of global liquefied natural gas (LNG) flow through this strait.

It connects the Persian Gulf to global markets, enabling energy exports from Saudi Arabia, Iraq, Kuwait, Iran, and the UAE, most of which head to Asia.

While Tehran has made similar threats in the past, it has never fully acted. Even during the 1980s “Tanker War,” when over 450 vessels were attacked, the Strait remained partially open. Today, the threat alone is enough to rattle global markets.

According to Kpler, oil prices have already jumped, with Brent crude touching a five-month high. Analysts warn that if Iran attempts even a partial blockade, prices could cross $100 per barrel.

However, a closure would hurt Iran, too. Over 90 per cent of Iranian oil, much of it routed unofficiallygoes to China.

If the Strait shuts down, Tehran risks cutting off its own revenue lifeline. China, Iran’s top buyer, is unlikely to support such a move.

The US, which sources most of its oil from Canada, would remain relatively insulated. Israel imports oil via the Mediterranean, largely from Azerbaijan, Gabon, and the US, so its direct exposure is minimal.

But nations like India, Japan, and South Korea—heavily reliant on Gulf energy would face severe supply disruptions. Insurance and shipping costs through the Strait have already spiked amid growing security concerns.

In short: the Strait of Hormuz is the global oil artery. Even short-term disruptions could cause lasting economic shockwaves.

Oil market enters panic zone

The financial markets are already showing signs of strain.

From below $63 a barrel at the end of May, Brent crude surged above $77, driven by fears of conflict escalation, as per Reuters. While prices briefly fell by 2 per cent on Friday, Brent is still set for its third straight weekly gain.

Citigroup has warned that if Iran closes the Strait of Hormuz, oil could spike to $90. Jennifer McKeown, chief global economist at Capital Economics, says if the US becomes directly involved in the war, Brent could surge to as high as $130–$150 per barrel.

Almost 20 per cent of global oil flows through the Strait, making it a critical vulnerability. Current Brent prices also carry a $10 geopolitical premium, according to traders quoted by Bloomberg.

Meanwhile, China’s record oil stockpiles are offering some buffer. As the biggest buyer of Iranian crude, Chinese refiners remain calm for now despite the crisis building in West Asia.

However, a further jump in crude could derail monetary easing plans by central banks. A surge in oil-driven inflation is a risk major economies want to avoid, especially amid Trump’s renewed tariff policies.

As Reuters reports, central banks are likely to delay rate cuts if oil breaches the $100 threshold again. For now, markets are bracing for volatility but haven’t fully priced in the worst-case scenario yet.

What about Iran’s economy?

Iran, long under US-led sanctions, is facing fresh economic wounds as Israeli airstrikes target its energy infrastructure.

According to Kpler, Iranian oil exports have fallen sharply, from 242,000 barrels per day earlier this year to just 102,000 bpd in the week ending June 16. Israeli missiles have partially disabled the South Pars gas field, which is responsible for 80 per cent of Iran’s natural gas production.

Meanwhile, Kharg Island, Iran’s primary export terminal for crude oil—has seen no tanker movement since last Friday, based on LSEG satellite data. That effectively freezes most of Iran’s seaborne oil exports.

Tehran’s finances under fire

Even before the latest conflict, Iran’s economy was running on thin margins. The Iranian rial has lost over 90 per cent of its value since 2018.

Inflation is officially at 40 per cent, but independent analysts such as TS Lombard estimate it could be even higher.

Iran’s oil revenue, once exceeding $100 billion in 2016—was just $50 billion across 2022–23, according to the US Energy Information Administration.

Roughly 22–27 per cent of Iranians now live below the poverty line, according to the Institute of Labour and Social Welfare, as cited by Tasnim News.

Tehran allocates about 3–5 per cent of GDP, around $12 billion annually for military purposes.

While its $33 billion in foreign reserves provides a cushion, analysts warn that using these reserves to fund extended military operations would threaten Iran’s long-term solvency.

Who will blink first?

Both Israel and Iran are approaching economic red lines.

For Israel, the challenge lies in juggling three simultaneous fronts—Gaza, Lebanon, and Iran—without crossing critical fiscal thresholds. Ratings agency S&P has hinted that a prolonged conflict could trigger a credit downgrade, raising Israel’s borrowing costs and spooking investors.

Iran’s situation is arguably more precarious. With energy revenues slashed, inflation surging, and no real access to global financial systems, Tehran has fewer levers to pull.

Unlike Israel, it cannot borrow easily or attract foreign investment.

Neither side wants a drawn-out war. But every extra day of conflict piles on economic risk and tests national endurance.

As this isn’t just a military clash—it’s a test of economic survival.