Oil based compressors are fine, i.e. suitable for food grade applications (and SCUBA/SCBA) if the contaminants are removed with proper filtration. There are several manufacturers of filter sets designed to do this specifically for food service, others who make them for SCUBA/SCBA and still others for other applications where oil removal is critical such as spray painting laquer. I happen to have a set of the latter type. From what I can see the main difference is that the filter bodies are not painted white. There is no oil in my beer. In fact I get the lovely, classic meringue like head on my lagers.
From an article by a director of the British Compressed Air Society: "Compressed air users should not be alarmed about the new Code of Practice. The Code clearly confirms that both; oil lubricated as well as oil free compressors are acceptable methods of generating compressed air for use in the Food Industry. Companies who are already using oil lubricated compressors in their food production process should not panic and feel that they have to rush out and purchase an oil free compressor. " Note that while this is the UK it appears that the ISO is driving the bus here. It's also interesting that most hits when researching this are from the UK. Perhaps they take this more seriously over there than we do here.
Further reading at http://www.processingtalk.com/news/prk/prk231.html
may be of interest. This article again emphasises that it is water
that is the main issue because it harbors bacteria. When they (UK CoP) want dry air they want really dry air i.e. a DP (at pressure) of -40 Â°C. So it is mostly water that would disqualify me for a food grade certification because I do not have a drier. If I installed one (actually the -40 DP is only required if the air comes in direct contact with the food and I never let that happen with beer because of another contaminant: oxyger) and swapped my oil for food grade oil my old Husky would qualify (I'm not about to do either). I've never been concerned about oil but have never thought about bacteria. As my kegs (that get blown out by compressed air) are subsequently steam sterilized and my fermenters subject to sanitizer rinse followed by a boiling water rinse I don't think I have to worry about bacteria in my air system either.