Arco Chemical Co. is in the catbird seat.

While the nation's major oil producers race to make their gasolines more environmentally sound, the Newtown Square, Pa., company holds the keys to about 35 percent of the world's supply of a sought-after fuel component: methyl tertiary butyl ether, or MTBE.The ingredient helps cut down on carbon monoxide and ozone-forming hydrocarbons from auto emissions.

So far, Arco Chemical, the world's largest producer of MTBE, has disclosed only that it will continue to increase production to meet a surge in demand for the additive.

But the company would not be specific. Too much hinges on decisions now percolating throughCongress as it sorts out the Clean Air Act, the company said.

"It's not a question if we will, but how we will," said Ed Dineen, Arco Chemical business manager for octane components.

"We feel strongly that there are environmental benefits to MTBE. We are trying to determine whether the industry will double, triple or quadruple."

Such forecasts will be influenced by the environmental standards Congress is expected to develop for fuel additives by the end of this year.

But even as new measures are being developed, MTBE use soared in the last decade.

MTBE is considered the fastest-growing petrochemical in the world, said Bill Ludlow, a vice president of DeWitt & Co., a Houston consulting company.

He projected that 100,000 barrels a day of MTBE would be used in the United States this year, compared with about 75,000 barrels in 1989 and 35,000 barrels in 1985.

"We watch a lot of petrochemicals, but we can't come up with any with this kind of growth profile," Mr. Ludlow said.

Arco Chemical started to produce MTBE for gasoline in 1979. It is a manufacturing byproduct of the company's workhorse chemical, propylene oxide.

Propylene oxide is a basic compound that has been used by the company's customers to make materials such as boat hulls, bowling balls, sink tops, moisturizers for tobacco and solvents for the cosmetics industry.

The company developed MTBE as a replacement for the gasoline additive lead, which was being phased out because of toxic emissions. Meanwhile, the demand for gasoline was growing, Mr. Dineen said.

"None of the drive at that time was environmental," he said. "The opportunity was a large gasoline market and the prospect for an octane need."

Over years of testing, Mr. Dineen said Arco Chemical and others realized that MTBE not only helped improve engine performance as an octane enhancer, but it also reduced undesirable emissions that can cause smog and lead to respiratory problems.

The chemical helps reduce emissions by adding more oxygen to the gasoline. Consequently, the fuel burns more completely, cutting down on pollutants. Other oxygenates are ethanol and methanol.

In the late 1980s, cities such as Denver; Albuquerque, N.M.; and Las Vegas, Nev., adopted programs that required the use of blending components, such as MTBE, in gasoline at times of the year when the air stagnates and traps pollutants.

Arco Chemical has tried to underscore the benefits of MTBE by publishing papers, putting on seminars, talking to Congress and educating local officials across the nation.

For instance, Arco Chemical established MTBE in the Denver market by shipping it by rail from Texas to refineries in Colorado. In the first year, the company said, it provided more than 90 percent of the MTBE used in Denver.

Until now, Arco Chemical has marketed MTBE primarily as an octane enhancer to oil refineries around the world. The chemical's growth has ballooned from 176 million gallons sold in 1985 to 735 million in 1989.

The company declined to say how much the chemical contributed to the company's $2.66 billion in revenue in 1989.

MTBE's traditional role is changing, Mr. Dineen said, as more of Arco Chemical's customers focus on its environmental benefits.

Oil and chemical firms have announced a 75 percent increase in U.S. MTBE capacity over the next three years, bringing total daily output to about 175,000 barrels, Mr. Dineen said.

Arco Chemical undertook plant expansions in Texas last year and will finish two projects in Europe this summer.

But Arco Chemical is not worried about large oil companies' starting their own MTBE programs.

"We believe that there is certainly room in the marketplace for new production and new competition," Mr. Dineen said.

"In an area growing as fast as MTBE, one can expect that other people will be interested in the business. If it weren't growing, and a lot of people were announcing capacity, we would be concerned."