Methodology used by Oxford Economics [i] in calculating BP’s impact on the UK economy
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.
Metrics used in economic impact studies
The economic impacts measured in this study are quantified using three metrics. These are:
Gross value added contribution to GDP – measures the contribution to the economy of each individual producer, industry or sector in the UK. It is a measure of net output, and the Office for National Statistics (ONS) aggregates gross value added for each industry in the UK economy to form the basis of GDP.[ii]
Employment – this is measured on a headcount rather than a full-time equivalent basis. This is to facilitate comparison with employment data for industry sectors and regions sourced from the ONS.
Tax revenues – this is the value of tax revenue flowing to the Exchequer or local authorities.
Modelling the UK economy using input-output tables
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.
Estimating regional impacts using Flegg and Webber’s methodology
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.
[iv] Leontief (1986), Input and output economics, second edition Oxford University Press.
[v] Flegg and Webber, (2000), Regional Size, Regional Specialization and the FLQ Formula. Regional Studies, Vol. 34.6, pages 563-569.
[vi] LQs are based on employment by sector by region.
[vIi] Oxford Economics
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.
BP created/generated refers to metrics – such as gross value added, jobs, and tax – for which BP is directly responsible at its operational sites (direct impacts).
BP supported refers to metrics – such as gross value added, jobs and tax – that other businesses created because of BP’s expenditure. For example, because BP purchased inputs of goods and services from them (indirect impacts), or because BP paid wages to its staff, who then spent them (induced impacts).
Capital expenditure is the money BP spent on fixed assets to be used by the business for more than a year.
Direct impacts are the gross value added, jobs and tax that BP generates at its operational sites.
EBITDA means earnings before interest, taxes, depreciation and amortization. It is a component of gross value added.
Employment or jobs is the number of people employed, regardless of whether their employment is full-time or part-time, or whether they are employed directly by BP or as an individual on a fixed-term contract.
Gross domestic product (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.
Gross value added (GVA) comprises the profits, business rates and employee compensation a business or industry creates or pays. UK GDP is gross value added summed across all businesses in the UK economy, plus net taxes and subsidies.
Indirect impacts are the gross value added, jobs, and tax that BP supported along its UK supply chain through its procurement of inputs of goods and services.
Sales and other operating income refers to the money earned through BP’s operational activities.
Procurement expenditure is the money BP spent on inputs of goods and services to be used up in the course of its operations in a single year.
Taxes are monetary payments to the Exchequer or local authorities.