The calculation of all impacts in this report is on a gross basis. The results, therefore, do not take into account the alternative potential uses of the people and other resources that BP and its suppliers use. This is standard practice due to difficulty determining the second-best use of any resource.
The economic impacts measured in this study are quantified using three metrics. These are:
In order to quantify BP’s indirect, induced and capital expenditure impacts, the analysis in this report is based on ONS analytical input-output (IO) tables. [iii] These tables can be used to estimate the impact on other industrial sectors as a result of BP’s spend on inputs of goods and services and fixed assets, and BP’s employees’ spend at leisure and retail outlets. IO tables can be employed to create industry multipliers, through the so-called Leontief system.[iv] Under the Leontief system, multipliers are calculated through a series of manipulations of the IO matrix.
The first manipulation is the creation of a base coefficients matrix, known as an ‘A’ matrix for the UK. In this matrix, every cell is expressed as a proportion of that industry’s output; for instance, any value in the mining column is expressed as a proportion of total mining output, and so on for each industry. The second step is creating an identity matrix, known as an ‘I’ matrix, whereby all values are zero except for when the consuming industry (columns) and the producing industry (rows) are the same; these cells are given a value of 1. The third action is the subtraction of the ‘A’ matrix from the ‘I’ matrix. The final manipulation is the inversion of the matrix produced in step three. The result of these matrix calculations is a table whereby the values represent the individual cross-multipliers for each sector, presenting the impact on each producing industry (row) of an increase by 1 unit of output in a consuming industry (column). The total multiplier for each consuming industry is the sum of the multipliers in the relevant column.
Following UK economic impact modelling, regional economic impact modelling was carried out using techniques initially developed by the academics Flegg and Webber. [v] The techniques involve constructing regional IO models by applying location quotients (LQs) [vi] and regional size adjustments to the standard UK IO tables. These adjustments allow for better estimates of the location of gross value added supported in the indirect, induced and capital expenditure channels. The result is that geographies with higher concentrations of industries receiving procurement or household expenditure have larger impacts.
An average annual exchange rate for 2017 of 1.2890 USD per GBP was used to convert currency values where necessary.[vii]
[i] Oxford Economics was founded in 1981 as a commercial venture with Oxford University’s business college to provide economic forecasting and modelling to UK companies and financial institutions expanding abroad. Since then, we have become one of the world’s foremost independent global advisory firms, providing reports, forecasts and analytical tools on more than 200 countries, over 100 industrial sectors and 4,000 cities and locations. Our best-of-class global economic and industry models and analytical tools give us an unparalleled ability to forecast external market trends and assess their economic, social and business impact.
[ii] GDP is the most commonly used aggregate measure of total economic activity in the UK (and elsewhere). It is used to assess the economy’s growth rate and whether the economy has entered or exited a recession. It is the sum of gross value added across all firms and sectors in the UK, plus the net of taxes and subsidies.
[iii] ONS, (2018), United Kingdom Input-Output Analytical Tables, 2014. Input-output tables are designed to give a snapshot of an economy at a particular time, showing the major spending flows from ‘final demand’ (i.e. consumer spending, government spending and exports to the rest of the world); intermediate spending patterns (i.e., what each sector buys from every other sector – the supply chain); how much of that spending stays within the economy; and the distribution of income between employment income and other income (mainly profits). In essence, an input-output model is a table that shows who buys what from whom in the economy. The latest available domestic-use input-output table for the UK, published by the ONS, was for the calendar year 2014.
The following terms are used in the report on BP’s impact on the UK economy. Every effort has been made to align reported figures with Office for National Statistics (ONS) norms.