Just as the Carter administration embarks on a program to bring 36 million homes up to federal insulation standards by 1985, contractors and manufacturers say they are experiencing the worst insulation shortage ever.

Insulation prices are rising, small contractors are being forced out of business, and homeowners and builders say the energy-saving product is unavailable.

The Small Business Administration is also conducting an investigation that some speculators and contractors are stockpilling material in warehouses hoping to force prices higher and drive smaller competitors out of business.

The shortage, which is also being felt acutely in Canada and Europe, comes on the heels of one of America's coldest winters, when high energy costs resulted in soaring demands for home insulation.

And even though major manufacturers of insulation say their plants are operating at full capacity, industry spokesmen said they expect the situation "to get a whole lot worse before it gets better." In part their reasoning is based on predicted increased demand for insulation accompanying President Carter's energy conservation package.

The version of the bill already approved by the House provides a $400 tax credit incentive for insulation, grant up to $800 to help low-income, families insulate their houses, and low-interest loans for medium-income families. The program also requires local utility companies to advise customers on their insulation needs as well as perform the insulation work if local contractors cannot handle the demand.

Last month, CertainTeed Insulation presented testimony before the House Subcommittee on Antitrust and Monopoly Legislation opposing the tax incentives because of an anticipated shortage.

Miles M. Wilson, a marketing manager for U.S. Gypsum Corp. rockwool insulation manufacturing, calls the President his "biggest salesman." But one insulation contractor, Washington contractor, Wayne Insulation in Alexandria, echoed the feelings of many contractors when he said the incentive program is "like hooking a damn mule behind the cart." The "government didn't check out the supply and now all it has done is raise the prices (of insulation) sky high" Whitlow said.

Like most contractors across the nation. Whitlow is having problems obtaining insulation. One of his suppliers has already notified him that he cannot expect a shipment until January.

Like many small contractors in the Washington area. William L. Skinner, president of Woodbridge Insulation in Larton, says he may have to go our of business soon if he cannot obtain insulation material. His business has been out of fiberglass for three weeks.

Along the Georgia-Alabama state line about 15 small contractors have already closed their businesses, and E.E. Bently Insulation Co., in Dothan, Ala., (the largest insulation company in a six-state area) is laying off workers saying it can only purchase $40 per cent of the material received last year."

Some insulation companies say they have been told not to expect any insulation shipments for a year and half.

To stay in business some contractors are converting from fiberglass to the more easily obtainable cellulose insulation, but several contractors say they have reservations about the material's flammability.

But even cellulose, which is made from ground-up newspapers, may be hard to come by because manufacturers of boric acid (used to make the paper flame retardant) can't keep pace with the increased demand.

Because of the heavy demand for insulation, homeowners and builders often are having to wait in line for insulation.

Large contractors and businesses dealing in cellulose can usually insulate a home within two weeks; but smaller contractors, who cannot obtain materials, often are turning away customers or making them wait up to two months for their homes to be insulated.

Insulation prices, which rose 8 per cent on the wholesale price index last year are expected to soar in 1977. Although major insulation manufacturers say their product's prices has risen from 6 to 10 per cent since January, many contractors who cannot buy directly from the manufacturers say they are sometimes paying double what they paid last year for the same product.

The shortage comes at a time when there are 25 to 50 million houses that could be reinsulated to conserve energy and about 1.8 million houses being built each year.

Manufacturers report that the 2.8 million homes that were insulated in the first six months of this year were more than twice the yearly average total for the past three years.

Most contractors say their business has increased anywhere from 28 to 1,400 per cent.

In trying to meet the increased demand, the three major fiberglass manufacturers - CertainTeed, OwensCorning and Johns-Manville - are all expanding their capacities.

But expansion of production facilities is not expected to be completed for two to seven years, and most manufacturers say they cannot forsee being able to catch up to demand for a couple of years. One cellulose manufacturer said it may be as long as 12 years.

A soon-to-released Commerce Department study predicts it will take until 1989 to reinsulate an estimated 25 million homes.

In the meantime, fiberglass is being rationed to contractors, with most munufacturers claiming to give their customers what they received last year or slightly more.

Manufacturers also said they are accepting new customers only under special circumstances. U.S. Gypsum, one of the big three insulation manufacturers, said it has not accepted any new customers for the past three months.

Many contractors, however, said they believe the insulation business is becoming a speculator's market - a situation that could drive up prices still further, while putting smaller businessmen out of work.

Steve Mollett, a Small Business Administration director of Advocacy Program (which serves as a "mouthpiece for small business"), said he had received several complaints from established businessmen who claimed they were being "squeezed out" by larger businesses that could obtain materials while they could not.

"We think there is a developing shortage of insulation because of boarding by middlemen to make prices go up and then flood the market with these higher priced materials" said Mollett.

Mollett, whose office is investigation the complaints, said he did not know whether such a practice was legals, but added he did "not think it was fair for you (manfacturers) to put someone in business and shut out all the other small businesses in the area."

While Federal Trade Commission attorney Sandra G. Wilkof calls stockpiling "just part of the American way," Dick Favretto, deputy director of operations for the antitrust division of the Department of Justice, says such actions may be illegal if the motive for stockpiling "was to put people out of business."

Associate Director for Evaluation of the FTC Charles W. Corddry III also said stockpilling or agreements to favor large businesses would be illegal if two independent businesses agreed "to cause competitive harm to a third body."

Several local businessmen said they were angry because Davenport Insulation in London, which says it is the world's largest thermal insulation contractor, is able to buy fiberglass insulation while they cannot.

Carol V. Davenport, president of the company and owner of Cellin Manufacturing, which produces cellulose insulation, said his company is receiving "at least 50 per cent more fiberglass now than last year."

According to Richard T. Wyche, manager of purchasing and supply, the company keeps its Lorton Warehouse stocked full fo fiberglass, with new orders going directly from manufacturers to a company truck.

While some businessmen say "it's just good business to keep your warehouse full," Ray Tichenor, with People's Insulation, said he thought such practices were one reason he could not obtain fiberglass, "leaving one product (cellulose, the product that is manufactured by Davenport) to insulate with."

Complaints are also being leveled against businessmen who have been in operation for as little as three months, but still are able to keep their warehouses full. Businessmen claim these new entrepreneurs are attempting to undercut their prices to put them out of business and then drive up their own prices.

The Bureau of Competition and the Bureau of Consumer Protection of the Federal Trade Commission have begun investigations of the insulation industry in anticipation of problems with the expanding market.

The Bureau of Consumer Protection is scheduled to make recommendations to the FTC commissioners in September regarding its study of the industry. According to FTC attorney Heidi Sanchez, the study deals primarily with misleading advertising and labeling, including possible inflated claims by insulation manufacturers of the heat penetration resistance of their products.

The Bureau of Competition announced an investigation this month concerning competitive practices within the industry to determine "if there are certain technology and patents which are possessed by the big three manufacturers making it possible for others to enter the industry." The investigation will also look at industrial "conduct," including possible price fixing.

A second agency, the Consumer Product Safety Commission will hold a hearing Aug. 22 dealing with a request for mandatory safety standards in the insulation industry. Testimony will concern allegations that fiberglass is cancer-causing and that insulation materials may not be fire-resistant.