ROLLOVER AND ASSIGNMENT AGREEMENT

     THIS ROLLOVER AND ASSIGNMENT AGREEMENT ("Rollover Agreement") is made as of
December  3, 1998 between Penn Octane Corporation, a Delaware corporation having
its  principal  office  at  900  Veterans  Boulevard,  Suite  510, Redwood City,
California  94063  (the  "Borrower") and the six Lenders set forth on Schedule I
                                                                      ----------
hereto  (each  a  "Lender",  collectively,  the  "Lenders").

     WHEREAS, pursuant to that certain Purchase Agreement dated October 21, 1997
(the "Purchase Agreement"), the Borrower issued to each Lender a promissory note
(with  respect  to  each  Lender,  the  "Original  Note"  and  collectively, the
"Original  Notes")  bearing  interest  at the rate of 10% per annum, dated as of
October  21,  1997 in the aggregate principal amount of One Million Five Hundred
Thousand  Dollars  ($1,500,000),  pursuant to which the Borrower is obligated to
repay  to each Lender the stated principal amount of such Lender's Original Note
(which  amount  is  set  forth opposite such Lender's name on Schedule I hereto)
                                                              ----------
plus  any accrued and unpaid interest thereon at the rate of 10% per annum (such
amount  with  respect  to  each  Lender,  the  "Loan");

     WHEREAS,  Borrower  has  represented to Lenders that: an arbitral award was
rendered  against International Bank of Commerce-Brownsville ("IBC") in favor of
Borrower;  the value of the arbitral award as of July 31, 1998 was approximately
$3.4  million; a judgment was entered on February 28, 1996 by the 197th District
Court  of  Cameron  County,  Texas  in  Civil  Action No. 94-08-4008-C, known as
International  Energy  Development  Corp.  v.  International  Bank  of
----------------------------------------------------------------------
Commerce-Brownsville;  such  judgment  modified  the  arbitral  award in certain
--------------------
respects;  an  appeal  was  taken  to  the  Court  of Appeals for the Thirteenth
District of Texas (the "Corpus Christi Court of Appeals"); on June 18, 1998, the
Corpus  Christi  Court  of  Appeals  rendered  an  Opinion  and  Order  in  No.
13-96-298-CV,  known  as International Bank of Commerce - Brownsville, Appellant
                         -------------------------------------------------------
v.  International  Energy  Development  Corp.,  Appellee, such Opinion and Order
--------------------------------------------------------
confirmed  the  original  arbitral  award  in  all respects; and IBC has filed a
motion  for  rehearing  with  the  Corpus  Christi  Court  of  Appeals;

     WHEREAS, the Borrower has requested each of the Lenders to continue to lend
the  original  principal amount of its respective Loan, and the Borrower intends
to  effect the equitable distribution to the Lenders of any payment, realization
or  proceeds  relating  to  or  arising  out  of the Judgment (as defined in the
Assignment);

     WHEREAS,  simultaneously upon the execution of this Rollover Agreement, the
Borrower  and  the Lenders have executed a Collateral Agreement substantially in
the  form  attached  hereto  as  Exhibit  A,  and the Borrower and Castle Energy
                                 ----------
Corporation  for itself and as Collateral Agent for the Lenders have executed an
Assignment  of  Judgment  Agreement substantially in the form attached hereto as
Exhibit  B  (respectively,  the  "Collateral  Agreement"  and  the "Assignment")
----------
pursuant to which (i) Castle Energy Corporation has been appointed as Collateral
Agent  by  the  Borrower  and Lenders (the "Collateral Agent"), and a collateral
account has been established by the Collateral Agent (the "Collateral Account");
(ii)  Borrower has agreed to instruct IBC in writing  (as attached as Annex 1 to
the  Collateral Agreement, the "Payment Instruction Letter") to make any payment

<PAGE>
of  Proceeds  (as  defined  in  the Assignment) into the Collateral Account; and
(iii)  Borrower  has  assigned  in trust to the Collateral Agent as assignee for
itself  and  on  behalf  of  all  the Lenders all of Borrower's right, title and
interest in and to the Judgment (as defined in the Assignment) and the Proceeds;
and  (iv)  the  Collateral  Agent  shall  distribute  any Proceeds paid into the
Collateral  Account  solely  as  set  forth  in  the  Collateral  Agreement;

     WHEREAS,  each  of  the Lenders has agreed to continue to lend the original
principal  amounts of its respective Loan subject to the terms and conditions of
this  Agreement, and to amend and restate its Original Note in consideration for
which  the  Borrower shall execute and deliver: (i) to the Collateral Agent, the
Assignment,  (ii)  to  each  Lender, an amended and restated Original Note (with
respect  to  each Lender, the "Amended Note", collectively, the "Amended Notes")
substantially in the form of Exhibit C hereto in such principal amount as is set
                             ---------
forth  opposite  such  Lender's name on Schedule I attached hereto, and (iii) to
                                        ----------
each  Lender,  warrants issued by the Borrower to such Lender to purchase shares
of  Common Stock, $.01 par value ("Common Stock") of the Borrower at an exercise
price  of  $1.75  per  share,  pursuant  to Section 2(c) hereof (the "Warrants",
together with the Amended Notes, the "Securities"), substantially in the form of
Exhibit  D  hereto;  and
----------

     WHEREAS,  the  Borrower  and  each  of  the  Lenders desire to enter into a
Registration  Rights  Agreement  with  respect  to  the  shares  of Common Stock
underlying  the  Warrants  (the  "Warrant Shares") and the Conversion Shares (as
defined below), substantially in the form of Exhibit E hereto (the "Registration
                                             ---------
Rights  Agreement"),  all  on  the  terms  and  conditions  set  forth  therein.

     NOW,  THEREFORE,  in  consideration  of the mutual covenants of the parties
contained  herein, and for other good and valuable consideration, the receipt of
which  is  hereby  acknowledged,  and  intending to be legally bound hereby, the
parties  hereto  agree  as  follows:

     1.  Continuation  of Loans.  Subject  to the terms  and  conditions  stated
         ----------------------
herein,  each Lender  hereby  agrees to continue to lend the original  principal
amount of its  respective  Loan  until the  Maturity  Date (as  defined  in this
Agreement).

     2. Assignment.
        ----------

          a. In consideration of the Lenders'  agreement to continue to lend the
     original  principal  amount of their  respective Loans subject to the terms
     and conditions stated herein, the Borrower hereby (i) agrees to execute and
     deliver to each of the Lenders at the Closing (as defined below) an Amended
     Note in such amount as is set forth opposite such Lender's name on Schedule
                                                                        --------
     I hereto and (ii) agrees to execute and deliver to the Collateral  Agent at
     -
     the Closing the  Assignment  and (iii) agrees to execute and deliver to the
     Lenders  at  the  Closing  the  Collateral   Agreement.   Borrower   hereby
     acknowledges that the Assignment and the Collateral  Agreement are executed
     as collateral  security and the execution and delivery thereof shall not in
     any way impair or diminish  the  obligations  of  Borrower to Lenders.  Any
     Proceeds  paid into the  Collateral  Account  shall be paid in trust to the

                                        2
<PAGE>
     Collateral Agent, shall be subject to the liens of the Collateral Agent for
     the  benefit of itself and the  Lenders,  and shall be  distributed  by the
     Collateral  Agent  in  accordance  with the  terms  and  conditions  of the
     Collateral Agreement.

          b.  Borrower  hereby  agrees to execute and deliver to the  Collateral
     Agent at the Closing the Payment  Instruction  Letter, in the form attached
     hereto as Annex 1 to the Collateral  Agreement which Collateral Agent shall
     send to IBC.

          c. In further  consideration of the Lenders'  agreement to continue to
     lend the principal  amount of their  respective  Loans subject to the terms
     and  conditions  stated  herein,  the Borrower shall execute and deliver to
     each Lender at the Closing, all Warrants to purchase shares of Common Stock
     expiring three years from the date hereof with an  exercise  price of $1.75
     per share,  in such numbers as are set forth  opposite  such  Lender's name
     on Schedule I hereto.
        ----------

          d. The number of  Warrants  to be issued to the Lenders at the Closing
     pursuant to Section 3(c) is subject to adjustment as set forth in Section 6
     of each Warrant.

     3. The Closing. The execution and delivery of this Rollover Agreement shall
        -----------
take place on December 3, 1998,  or at such other date as the  Borrower  and the
Lenders shall agree (the "Closing").

     4.  Amendment of the Original  Notes.  Each Lender  hereby agrees that upon
         --------------------------------
delivery at the Closing by the  Borrower  of an Amended  Note in such  principal
amount set forth  opposite such Lender's name on Schedule I hereto,  such Lender
                                                 ----------
shall mark its Original  Note  "amended and  restated";  and, the Original  Note
shall be deemed to be amended and restated in its entirety by the Amended Note.

     5. Registration  Rights.  The Lenders shall have such  registration  rights
        --------------------
with respect to the Warrant Shares and the Conversion Shares as are set forth in
the Registration Rights Agreement.

     6. Interest Rate; Default Interest Rate; Remedies. The Borrower and each of
        ----------------------------------------------
the Lenders  agree that the Amended  Notes shall accrue  interest at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31 and June 30,
1999 (or the Maturity  Date if  earlier).  Upon the  occurrence  of any Event of
Default (as set forth in the Amended  Note) under any one of the Amended  Notes,
the indebtedness  owing under each Amended Note shall become immediately due and
payable in full and shall accrue  interest at the rate of twelve  percent  (12%)
per cent per annum until the entire remaining  principal balance of each Amended
Note shall have been paid in full  together with all interest  accrued  thereon;
and the holder of each  Amended Note may exercise all of its rights and remedies
under the Rollover  Agreement and all other  documents  executed or delivered in
connection therewith and/or applicable law.

                                        3
<PAGE>
     7. Maturity.  All outstanding principal of, and accrued and unpaid interest
        --------
on,  each  Amended  Note shall be due and payable on the earlier to occur of any
one of the following dates or events (the "Maturity Date"):

          a. June 30, 1999;

          b. a date  determined by the Borrower within ten (10) business days of
     the  closing  date  of any  raising  of  debt or  equity  financing  of the
     Borrower,   resulting  in  net  proceeds  to  the  Borrower  in  excess  of
     $2,250,000; or

          c. an Event of Default (as defined in the Amended Notes).

     7A.     Conversion  of  Indebtedness.  Any  outstanding  principal  and/or
             ----------------------------
accrued  and  unpaid  interest  which  remains due and payable in respect of any
Amended  Notes  after  June  30,  1999  (with  respect to each Amended Note, the
"Overdue  Indebtedness")  shall,  upon the written request (with respect to each
Amended  Note,  a  "Conversion  Notice") of the holder of such Amended Notes, be
converted  by  the  Company,  in  whole  but  not  in  part, into such number of
newly-issued shares of Common Stock of the Company (with respect to each Amended
Note, the "Conversion Shares") equal to the quotient of the Overdue Indebtedness
at the time of receipt by the Company of the Conversion Notice divided by $1.50.

The  Company  hereby  agrees  to  deliver  any Conversion Shares to the relevant
holder  of  an Amended Note as soon as practicable after receipt of a Conversion
Notice  and upon surrender of the Amended Note being so converted to the Company
by  the  holder  thereof but in no event later than ten (10) business days after
receipt  of  the Conversion Notice (the "Issuance Deadline").  Upon the issuance
of the Conversion Shares in respect of an Amended Note, such Amended Note shall,
from  the  date  of  receipt  by  the Company of the Conversion Notice, cease to
accrue  any  interest,  and  all of the Company's obligations in respect of such
Amended Note shall be deemed satisfied in full upon the issuance and delivery to
the  holder  of  such  Amended  Note of the Conversion Shares.  In addition, any
Conversion  Shares  issued  pursuant  to this Agreement shall be entitled to the
registration  rights  provided  for  in  the  Registration  Rights  Agreement.

     8. Pro Rata Payments.  Any payment by the Borrower of any amounts under the
        -----------------
Amended  Notes  shall  be made to each  Lender  pro  rata in  proportion  to the
principal  amount  outstanding  under such Lender's  Amended Note over the total
amount  outstanding  under all the Amended  Notes  calculated  as of the date of
payment.  Each payment made by the Borrower  relating to the Amended Notes shall
be applied  first to accrued and unpaid  interest on, and second to  outstanding
principal of, the Amended Notes.

     9. Representations,  Warranties and Covenants of the Borrower. The Borrower
        ----------------------------------------------------------
represents,  warrants and  covenants  that as of the  Closing,  and at all times
thereafter until the Amended Notes are paid and satisfied in full:

                                        4
<PAGE>
          a. The Borrower is and shall be a corporation duly organized,  validly
     existing and in good standing under the laws of the State of Delaware,  and
     has and will have the  requisite  corporate  power and authority to execute
     and  deliver  this  Rollover  Agreement  and  to  perform  its  obligations
     hereunder.

          b. The execution,  delivery and performance of this Rollover Agreement
     have  been  and  will  continue  to be  duly  authorized  by all  necessary
     corporate  action  on the  part  of the  Borrower  and do not  violate  any
     covenant contained in any agreement to which the Borrower is a party.

          c. The  Warrant  Shares and the  Conversion  Shares,  when issued upon
     exercise of the Warrants and payment therefor or upon conversion of Amended
     Notes, as the case may be, will be legally and validly  issued,  fully paid
     and nonassessable.

          d. The  Borrower  owns all  right  title  and  interest  in and to the
     Judgment  and the  Proceeds;  and  except  as  otherwise  set forth in this
     Rollover  Agreement  and the  Collateral  Agreement,  the  Borrower has not
     created  or  suffered  to exist and will not create or suffer to exist with
     respect to the  Judgment or the Proceeds  any  security  interest,  pledge,
     assignment,  encumbrance,  lien  (statutory or otherwise) or other security
     agreement  or  preferential  arrangement  or transfer of any kind or nature
     whatsoever.

          e. The  Borrower has not received any payment or Proceeds nor realized
     all or any part of the Judgment; and if the Borrower hereafter receives any
     payment or Proceeds or realizes all or any part of the  Judgment,  it shall
     hold the same in trust for the  benefit of the Lenders and deliver the same
     to  the  Collateral  Agent  in  the  form  received  immediately  upon  the
     Borrower's receipt thereof.

          f. The Judgment has not been reversed,  dismissed, modified or vacated
     by any court;  and the Borrower will notify the Lenders  immediately of any
     such reversal, dismissal, modification or vacation.

          g. The Borrower will notify the Lenders  immediately of any raising of
     debt or equity  financing that has or potentially may result in proceeds to
     the Borrower in excess of $2,250,000,  net of transaction  expenses related
     to such  offering and any such excess  shall be paid to Lenders,  pro rata,
                                                                       --- ----
     immediately upon Borrower's receipt thereof.

                                        5
<PAGE>
     10.  Representations  and  Warranties of the Lenders.  Each of the Lenders,
          -----------------------------------------------
severally  and not  jointly,  represents  and  warrants to the  Borrower,  as to
itself, as follows:

          a. General:
             -------

               (i) The Lender  has all  requisite  authority  to enter into this
          Rollover  Agreement and to perform all of the obligations  required to
          be performed by it hereunder.

               (ii) Neither the Borrower nor any person  acting on behalf of the
          Borrower has offered or sold the  Securities to the Lender by means of
          any form of general  solicitation or general  advertising.  The Lender
          has  not  received,  paid  or  given,  directly  or  indirectly,   any
          commission  or  remuneration  for or on  account  of any sale,  or the
          solicitation of any sale, of the Securities.

          b. Information Concerning the Borrower: Solely for the purpose of this
             -----------------------------------
     Rollover  Agreement  and  the  Warrants,  and not  for  any  other  purpose
     whatsoever:

               (i) The  Lender  is  familiar  with the  business  and  financial
          condition, properties, operations and prospects of the Borrower.

               (ii) The  Lender  has been  given  full  access  to all  material
          information  concerning  the  condition,  properties,  operations  and
          prospects of the  Borrower.  The Lender and its advisors (if any) have
          had an  opportunity  to ask questions  of, and to receive  information
          from,  the Borrower and persons  acting on its behalf  concerning  the
          terms and conditions of the Lender's investment in the Securities, and
          to obtain any additional  information necessary to verify the accuracy
          of the  information  and data  received by the  Lender.  The Lender is
          satisfied  that  there  is  no  material  information  concerning  the
          condition,  properties,  operations  and  prospects of the Borrower of
          which the Lender is unaware.

               (iii) The  Lender has made,  either  alone or  together  with its
          advisors (if any), such independent investigation of the Borrower, its
          management,  and  related  matters as the  Lender  deems to be, or the
          Lender's  advisors (if any) have advised to be, necessary or advisable
          in connection  with this  investment;  and the Lender and its advisors
          (if any) have received all  information  and data which the Lender and
          its  advisors  (if any)  believe to be  necessary in order to reach an
          informed   decision  as  to  the  advisability  of  investing  in  the
          Securities.

               (iv) The Lender understands that all the Lender's representations
          and warranties  contained in this Rollover Agreement will be deemed to
          have been reaffirmed and confirmed as of the Closing.

                                        6
<PAGE>
               (v) The Lender  understands  that  acceptance  of the  Securities
          involves  various  risks,  including the risk that it is unlikely that
          any market  will exist for any resale of the  Securities,  the Warrant
          Shares or the Conversion Shares and that resale of the Securities, the
          Warrant Shares or the  Conversion  Shares will be restricted as herein
          provided.

     c. Status of Lender:
        ----------------

               (i) The Lender  either  alone or with its  advisors  (if any) has
          such  knowledge,  skill and  experience  in  business,  financial  and
          investment matters as to be capable of evaluating the merits and risks
          of an investment in the Securities.  To the extent that the Lender has
          deemed it  appropriate  to do so, the Lender has  retained  and relied
          upon,  appropriate  professional advice regarding the investment,  tax
          and legal  merits and  consequences  of this  Rollover  Agreement  and
          owning the Securities,  the Warrant Shares and the Conversion  Shares,
          as the case may be.

     d. Restrictions on Transfer or Sale:
        ------------------------------------

               (i) The Lender is acquiring the Securities and any Warrant Shares
          purchased  upon  exercise of the  Warrants or  Conversion  Shares upon
          conversion of Amended Notes solely for its own account, for investment
          purposes,  and not with a view to, or for resale in  connection  with,
          any  distribution  of the Amended  Note,  the Warrants or such Warrant
          Shares or Conversion  Shares.  The Lender understands that neither the
          Amended  Note,  the Warrants  nor such  underlying  Warrant  Shares or
          Conversion  Shares have been  registered  under the  Securities Act of
          1933, as amended (the "Securities Act"), or the securities laws of any
          state (collectively  referred to as "State Securities Laws") by reason
          of specific  exemptions  under the provisions  thereof which depend in
          part  upon  the  investment  intent  of the  Lender  and on the  other
          representations  made by the Lender in this  Rollover  Agreement.  The
          Lender   understands   that  the   Borrower   is   relying   upon  the
          representations  and agreements  contained in this Rollover  Agreement
          (and any  supplemental  information)  for the  purpose of  determining
          whether this transaction meets the requirements for such exemptions.

               (ii) The Lender  understands  that the Amended Note, the Warrants
          and  such  underlying   Warrant  Shares  and  Conversion   Shares  are
          "restricted  securities" under applicable  federal securities laws and
          that the  Securities  Act and the rules of the Securities and Exchange
          Commission (the "Commission") provide in substance that the Lender may
          dispose  of  such  securities  or  any of  them  only  pursuant  to an
          effective  registration  statement  under  the  Securities  Act  or an
          exemption  therefrom,   and  understands  that  the  Borrower  has  no
          obligations   or  intentions  to  register  any  of  such   securities
          thereunder, or to take any other action so as to permit sales pursuant
          to the Securities Act, except as set forth in the Registration  Rights
          Agreement.   Accordingly,   the  Lender  understands  that  under  the
          Commission's  rules,  unless  disposed  of  pursuant  to an  effective
          registration statement under the

                                        7
<PAGE>
          Securities Act, the Lender may dispose of the Amended Note,  Warrants,
          underlying  Warrant  Shares and  Conversion  Shares only in accordance
          with the  provisions  of Rule 144 under  the  Securities  Act,  to the
          extent  available,  or in "private  placements"  which are exempt from
          registration  under the  Securities  Act,  or  pursuant  to such other
          exemptions  as may be  available  in which event the  transferee  will
          acquire "restricted  securities" subject to the same limitations as in
          the hands of the Lender.  As a  consequence,  absent such an effective
          registration   statement   under  the   Securities   Act,  the  Lender
          understands  that it may be required to bear the economic risks of the
          investment in the Securities  (and the  underlying  Warrant Shares and
          Conversion Shares) for an indefinite period of time.

               (iii)  The  Lender  agrees  that  (a) it will not  sell,  assign,
          pledge, give, transfer,  of otherwise dispose of the Amended Note, the
          Warrants or such underlying Warrant Shares or Conversion Shares or any
          interest in any thereof or therein, or make any offer or attempt to do
          any  of  the  foregoing,  except  pursuant  to  registration  of  such
          securities   under  the  Securities  Act  and  any  applicable   State
          Securities  Laws or in a transaction  which, in the opinion of counsel
          for the Lender  satisfactory to the Borrower (which requirement may be
          waived by the  Borrower  upon advice of  counsel),  is exempt from the
          registration provisions of the Securities Act and any applicable State
          Securities  Laws;  (b)  the  Amended  Note  and the  Warrants  and any
          certificate(s)   representing  shares  of  Common  Stock  issued  upon
          exercise of the  Warrants  may bear a legend  making  reference to the
          foregoing  restrictions;  and (c) the Borrower and any transfer  agent
          for shares of its Common Stock shall not be required to give effect to
          any  purported   transfer  of  any  of  such  securities  except  upon
          compliance with the foregoing restrictions.

               (iv)  The  registration  rights  granted  to  the  Lender  in the
          Registration   Rights   Agreement  are  not  assignable  or  otherwise
          transferrable by the Lender except for assignment to affiliates and/or
          subsidiaries of the Lenders.  In no event shall any sale,  assignment,
          pledge or  transfer  of the  Warrants,  Warrant  Shares or  Conversion
          Shares by the Lender to a transferee give rise to any rights under the
          Registration  Rights  Agreement  except for  assignment  to affiliates
          and/or subsidiaries of the Lenders.

     11.  Conditions to Obligations of Lender and the Borrower.  The obligations
          ----------------------------------------------------
of each of the  Lenders  and the  Borrower  under this  Rollover  Agreement  are
subject  to the  satisfaction  at or  prior  to  the  Closing  of the  following
conditions precedent:

          a. The  representations  and  warranties of the Borrower  contained in
     Section 9 hereof and of each Lender contained in Section 10 hereof shall be
     true and  correct on and as of the  Closing in all  respects  with the same
     effect as though  representations and warranties had been made on and as of
     the Closing.

                                        8
<PAGE>
          b. The Borrower and the Lenders  shall have executed and delivered the
     Registration Rights Agreement.

          c. Each Lender  shall have  received a duly  executed  Amended Note in
     such  principal  amount set forth opposite such Lender's name on Schedule I
                                                                      ----------
     hereto.

          d. The Borrower and the Lenders  shall have executed and delivered the
     Collateral Agreement.

          e. The  Borrower  and the  Collateral  Agent shall have  executed  and
     delivered the Assignment.

          f. The Borrower  shall have executed and delivered to the Lenders with
     respect to the Judgment and the Proceeds such  documentation as Lenders and
     any of their  respective legal counsel may require to effect or perfect the
     assignment of and security  interests in the Judgment,  including,  without
     limitation, UCC-1 Financing Statements.

          g. No Event of Default (as defined in the  Amended  Notes)  shall have
     occurred.

     12.  Waiver,  Amendment.  Neither this Rollover  Agreement,  the Collateral
          ------------------
Agreement,  the Amended  Notes,  the  Assignment  nor any  provisions  hereof or
thereof  shall be  modified,  changed,  discharged  or  terminated  except by an
instrument  in writing  signed by the party  against  whom any  waiver,  change,
discharge or termination is sought.

     13. Assignability.  Except as otherwise provided in this Rollover Agreement
         -------------
and the  Collateral  Agreement,  neither this Rollover  Agreement nor any right,
remedy,  obligation or liability  arising hereunder or by reason hereof shall be
assignable  by either the  Borrower  or any Lender  hereunder  without the prior
written  consent of the other party,  which  consent  shall not be  unreasonably
withheld, except for Assignments to affiliates and/or subsidiaries of Lender.

     14.  Applicable  Law.  This  Rollover  Agreement  shall be  governed by and
          ---------------
construed in accordance with the law of the State of New York, regardless of the
law that might be applied under principles of conflicts of law.

     15.  Submission  to  Jurisdiction.  The  Borrower  and each  Lender  hereby
          ----------------------------
irrevocably  agrees that any legal action or proceedings  brought  against it or
any of its property with respect to this Rollover Agreement or the Amended Notes
may be brought in any state or Federal court located in the City of New York, or
both,  and by execution  and  delivery of this  Rollover  Agreement  each hereby
submits to and accepts with regard to any such action or proceeding,  for itself
and in respect of its property, generally and uncon-ditionally, the jurisdiction
of the aforesaid courts.  The Borrower and each Lender  irrevocably  consents to
the service of process in any such action or proceeding by the mailing of copies

                                        9
<PAGE>
thereof by registered or certified airmail,  postage prepaid, to the Borrower at
its address set forth in Section 19.
                         ----------

     16. WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE
         --------------------
FULLEST EXTENT  PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY  LITIGATION  ARISING  DIRECTLY OR INDIRECTLY  UNDER OR IN
CONNECTION WITH THIS ROLLOVER AGREEMENT OR THE AMENDED NOTES.

     17. Section and Other Headings. The section and other headings contained in
         --------------------------
this Rollover Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Rollover Agreement.

     18. Counterparts.  This Rollover Agreement may be executed in any number of
         ------------
counterparts, each of which when so executed and delivered shall be deemed to be
an  original  and all of which  together  shall be deemed to be one and the same
agreement.

     19. Notices. All notices and other communications provided for herein shall
         -------
be in  writing  and  shall be  deemed  to have  been  duly  given  if  delivered
personally  or by  facsimile  (with proof of receipt) or sent by  registered  or
certified mail, return receipt requested, postage prepaid:

          a.   To the Borrower:

               Penn  Octane  Corporation
               900  Veterans  Boulevard,  Suite  240
               Redwood  City,  California  94603

               Attn:     Jerome  B.  Richter,
                         President

          b. If to a Lender, at the address set forth beneath such Lender's name
     on  Schedule  I hereto;  or at such other  address as any party  shall have
         -----------
     specified by notice in writing to the other parties.

     20.  Binding  Effect.  The provisions of this Rollover  Agreement  shall be
          ---------------
binding  upon  and  accrue  to the  benefit  of the  parties  hereto  and  their
respective heirs, legal representatives, successors and permitted assigns.

     21. Severability.  Any provision in this Rollover Agreement that is held to
         ------------
be inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as
to that  jurisdiction,  be ineffective,  unenforceable,  void or invalid without
affecting the remaining  provisions in any other  jurisdiction,  and to this end
the provisions of this Rollover Agreement are declared to be several.

                                       10
<PAGE>
          IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement  as  of  this  1st  day  of  December,  1998.


                                   PENN  OCTANE  CORPORATION


                                   By:
                                         ----------------------------------
                                   Name:  Jerome  B.  Richter
                                   Title:  Chairman,  President  and  Chief
Executive  Officer



                                       11
<PAGE>
     IN  WITNESS  WHEREOF,  the  Company  and the undersigned have executed this
Agreement  as  of  this  1st  day  of  December,  1998.


                                   CASTLE  ENERGY  CORPORATION


                                   By:
                                         ----------------------------------
                                   Name:
                                         ----------------------------------
                                   Title:
                                         ----------------------------------



                                       12
<PAGE>
     IN  WITNESS  WHEREOF,  the  Company  and the undersigned have executed this
Agreement  as  of  this  1st  day  of  December,  1998.




                          ______________________________________
                                        Clint  Norton



                         SOUTHWEST  CONCEPT  INC.


                         By:
                              ---------------------------------
                              Name:
                              Title:





                                       13
<PAGE>
     IN  WITNESS  WHEREOF,  the  Company  and the undersigned have executed this
Agreement  as  of  this  1st  day  of  December,  1998.



                              ___________________________________________
                                        James  F.  Meara,  Jr.


                              SEP  FBO  JAMES  F.  MEARA  IRA

                              By:     Donaldson,  Lufkin  &  Jenrette  as
                                   Securities  Corporation  Custodian



                              By:
                                   ---------------------------------
                              Name:
                              Title:



                                       14
<PAGE>
     IN  WITNESS  WHEREOF,  the  Company  and the undersigned have executed this
Agreement  as  of  this  1st  day  of  December,  1998.



                    LINCOLN  TRUST  COMPANY  FBO  PERRY  D.  SNAVELY  IRA


                    By:
                         --------------------------------
                    Name:
                    Title:



                                       15
<PAGE>
                                  SCHEDULE  I

Lenders  and  Addresses
-----------------------

Castle Energy Corporation        Principal amount of promissory note: $1,000,000
c/o  CEC,  Inc.
One Radnor Corporate Center      Warrants:  225,000
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle

with  a  copy  to:

Tom  Spencer,  Esq.
Duane  Morris  &  Hecksher  LLP
One  Liberty  Place,  42nd  floor
Philadelphia,  Pennsylvania  19103-7396

                                       1
<PAGE>
                                  SCHEDULE  I


Lenders  and  Addresses
-----------------------

Clint  Norton                       Principal amount of promissory note: $90,000
17110 Dallas Parkway, Suite 120
Dallas,  Texas  75248               Warrants:  20,250
(972)  931-8509



Southwest  Concept  Inc.            Principal amount of promissory note: $60,000
17110 Dallas Parkway, Suite 120
Dallas,  Texas  75248               Warrants:  13,500
Attn:  Clint  Norton
(972)  931-8509


                                       2
<PAGE>
                                  SCHEDULE  I


Lenders  and  Addresses
-----------------------

James  F.  Meara,  Jr.              Principal amount of promissory note:
$75,000
8150 N. Central Expressway, #795
Dallas,  Texas  75206               Warrants:  16,875
(214)  692-7066



Donaldson  Lufkin  Jenrette         Principal  amount  of promissory note:
$75,000
Securities Corporation Custodian
SEP FBO James F. Meara IRA          Warrants:  16,875
Pershing Division of Donaldson Lufkin &
Jenrette  Securities  Corporation
P.O.  Box  2050
Jersey  City,  New  Jersey  07399
(214)  692-7006

                                       3
<PAGE>
                                   SCHEDULE I


Lenders  and  Addresses
-----------------------

Lincoln  Trust  Company            Principal amount of promissory note: $200,000
FBO  Perry  D.  Snavely  IRA
P.O.  Box  5831                    Warrants:  45,000
Denver,  Colorado  80217
Attn:  Monique  Rice
(610)  260-6388

                                       4
<PAGE>
                                                                       EXHIBIT A
                                                                       ---------

                              COLLATERAL AGREEMENT
                              --------------------



<PAGE>
                                                                       EXHIBIT B
                                                                       ---------

                             ASSIGNMENT OF JUDGMENT
                             ----------------------



<PAGE>
DECEMBER  1,  1998                                                     EXHIBIT C
                                                                       ---------


                             AMENDED PROMISSORY NOTE
                             -----------------------

                            Redwood City, California


     FOR  VALUE  RECEIVED,  PENN OCTANE CORPORATION, a Delaware corporation (the
"Borrower"),  promises  to  pay  to  the  order  of  _____________________,  a
__________________,  or its assigns ("Holder"), at the office of the Borrower in
Redwood  City, California or such other place as Holder may designate in writing
at  least  three  business  days  prior  to the date fixed for such payment, the
entire  principal  sum  of  _____________________($_________),  together  with
interest thereon, on the earlier of (i) June 30, 1999, (ii) a date determined by
the Borrower within ten (10) business days of the closing date of any raising of
debt  or  equity  financing  of  the  Borrower, resulting in net proceeds to the
Borrower  in excess of $2,250,000 or (iii) the occurrence of an Event of Default
hereunder  (collectively,  the "Maturity Date"), at which time all principal and
any  accrued  and  unpaid  interest  thereon  shall  be  due  and  owing.

     This  Amended Note was issued under and is entitled to the benefits of that
certain  Rollover  and  Assignment  Agreement  dated as of December 1, 1998 (the
"Rollover  Agreement")  dated  the date hereof by and among the Borrower and the
Lenders as set forth in Schedule I of the Agreement.  All capitalized terms used
                        ----------
herein  and not defined shall have the meanings ascribed to them in the Rollover
Agreement.

     This Amended Note shall accrue interest from the date hereof at the rate of
ten percent (10%) per annum, payable on December 31, 1998, March 31 and June 30,
1999  (or  the  Maturity  Date, if earlier).  Upon the occurrence of an Event of
Default  (as  defined  herein),  all amounts owing under this Amended Note shall
become  immediately  due  and  payable  and interest shall accrue thereon at the
default  interest  rate  of  twelve  percent  (12%)  per  annum until the entire
principal  balance  of  this  Amended Note and all interest accrued hereon shall
have  been  paid  in  full  and  the  Holder  may exercise all of its rights and
remedies  under  the  Rollover  Agreement  and  all  other documents executed or
delivered  in  connection  therewith  and/or  applicable  law.  Payment  of this
Amended Note may be enforced by suit or other process of law.  This Amended Note
may  be prepaid at any time prior to maturity without penalty in an amount equal
to  the principal amount hereof plus interest thereon to the date of prepayment.

     The Borrower shall pay the sum of $__________ to the holder on December 11,
1998 which sum represents accrued and unpaid interest to December 1, 1998 on the
Original  Note  (the  "Original  Note  Interest).

     All  payments  hereunder  shall  be  payable  in lawful money of the United
States.

       The  Borrower shall be in default hereunder upon the occurrence of any of
the  following  events of default ("Events of Default"):  (i) the failure by the
Borrower  to pay the Original Note Interest when due hereunder; (ii) the failure
by the Borrower to make any payment (other than the Original Note Interest) when
due  hereunder  and  such  failure shall have continued for a period of ten (10)
days; (iii) the commencement by the Borrower of a voluntary case in a bankruptcy
or  insolvency  proceeding  or  the  entry  of  a  decree or order by a court of
competent  jurisdiction  adjudicating the Borrower a bankrupt or the appointment
of a receiver or trustee of the Borrower upon the application of any creditor in
an insolvency or bankruptcy proceeding or other creditor's suit; (iv) a petition
for  reorganization, liquidation or arrangement filed against the Borrower under
the  Federal  bankruptcy  laws  and  such petition shall not have been dismissed

<PAGE>
within thirty (30) days after it was filed; (v) an assignment for the benefit of
creditors by the Borrower; (vi) the occurrence of any event of default under the
terms  of  any  indebtedness  of  the  Borrower  for borrowed money in excess of
$50,000;  (vii)  the  existence  of  any  final,  non-appealable judgment on any
Amended Note or any final, non-appealable judgment in excess of $50,000 against,
or any attachment of material property, of the Borrower; or (viii) the breach of
any  representation,  warranty  or  covenant  (other  than  as  described in the
preceding  clauses (i) through (vii)) of Borrower in the Rollover Agreement, the
Assignment  of  Judgment or Collateral Agreement, and, if such breach is capable
of  cure, the failure of Borrower to cure such breach within a period of fifteen
(15)  days,  provided  that  such  breach  is  capable  of  cure.

     If  any payment owing under this Amended Note is not paid when due, whether
at  maturity  or  by  acceleration  or otherwise, the Borrower agrees to pay all
reasonable costs of collection and such costs shall include, without limitation,
all  costs, attorneys' fees and expenses incurred by Holder hereof in connection
with  any  insolvency,  bankruptcy,  reorganization,  arrangement  or  similar
proceedings  involving  Borrower, or involving any endorser or guarantor hereof,
which  in  any  way  affects  the  exercise  by  Holder hereof of its rights and
remedies  under  this  Amended  Note.

     If  any  payment remains owing under this Amended Note after June 30, 1999,
the  Holder  hereof  shall  have  certain  conversion  rights in respect of such
Amended  Note  as  set  forth  in  Section  7A  of  the  Rollover  Agreement.

     Presentment,  demand,  protest, notice of protest, dishonor and non-payment
of  this  Amended  Note  and  all  notices  of  every  kind  are  hereby waived.

     The  terms  "Borrower"  and  "Holder"  shall  be construed to include their
respective  heirs,  personal representatives, successors, subsequent holders and
permitted  assigns.

     No  delay  on the part of the Holder in the exercise of any right or remedy
shall  operate  as a waiver thereto, and no single or partial exercise by Holder
of  any  right  or  remedy  shall  preclude  the further exercise thereof or the
exercise  of  any  other  right  or  remedy.

     Any  provision  in  this  Amended  Note  that  is  held  to be inoperative,
unenforceable,  voidable  or  invalid  in  any  jurisdiction  shall,  as to that
jurisdiction,  be  ineffective, unenforceable, void or invalid without affecting
the  remaining  provisions  in  any  other  jurisdiction,  and  to  this end the
provisions  of  this  Amended  Note  are  declared  to  be  severable.

<PAGE>
     This  Amended  Note shall be governed by, and construed in accordance with,
the  laws  of  the  State  of  New  York  without  giving effect to such state's
conflicts of law provisions.  Each of the parties hereto irrevocably consents to
the  jurisdiction and venue of the federal and state courts located in the State
of  New  York,  County  of  New  York.


     IN  WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower
has caused this Amended Note to be executed by its duly authorized officer as of
the  date  first  above  written.


                                        PENN  OCTANE  CORPORATION


Attest:                                 By:
                                        ------------------------------
                                             Jerome  B.  Richter
______________________________________       Chairman,  President  and
Title:  ______________________________       Chief  Executive  Officer

<PAGE>
                                                                       EXHIBIT D
                                                                       ---------


                     NEITHER THIS WARRANT NOR THE SHARES OF
                       COMMON STOCK ISSUABLE UPON EXERCISE
          HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
          AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
          NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
          UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
          THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
                         THEREFROM UNDER APPLICABLE LAW.

                          COMMON STOCK PURCHASE WARRANT
                          Void after November 30, 2001

                                               Warrant to Purchase ______ Shares
                                                 of Common Stock, $.01 par value
                                                      of Penn Octane Corporation

                         PENN OCTANE CORPORATION (POCC)

This  is  to  Certify  That,  FOR  VALUE  RECEIVED,

                               [Name of Purchaser]

or  registered  assign(s)  (herein  referred  to as the "Holder") is entitled to
purchase,  subject  to  the  provisions  hereof, from PENN OCTANE CORPORATION, a
Delaware  corporation  (the "Company"), but not later than 5:00 p.m., California
time,  on  November  30, 2001 (or, if such date is not a Business Day in Redwood
City,  California,  then  on  the  next succeeding day which shall be a Business
Day),  _______  shares  of  Common  Stock,  $.01  par value, of the Company (the
"Common  Stock")  at an exercise price of $1.75 per share, subject to adjustment
as  to number of shares and purchase price as set forth in Section 6 below.  The
exercise  price of a share of Common Stock in effect at any time and as adjusted
from  time to time is hereinafter sometimes referred to as the "Exercise Price".
For  purposes  of this Warrant, a "Business Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
or  in  Redwood  City, California, are authorized by law or regulation to close.

The  shares of Common Stock issuable upon exercise of the Warrants are sometimes
herein  called  the  "Warrant  Stock."

     1.  Exercise of Warrant.  This Warrant may be exercised in whole or in part
         -------------------
at any time and from time to time by  presentation  and surrender  hereof to the
Company at its  principal  office with the  Purchase  Form  annexed  hereto duly
executed  and  accompanied  by  payment  of the  Exercise  Price in  immediately
available funds for the number of shares specified in such form. If this Warrant
is exercised in part only, the Company shall, upon surrender of this

<PAGE>
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder.  Upon
receipt  by  the Company of this Warrant at the office of the Company, in proper
form  for  exercise,  accompanied  by  payment of the Exercise Price, the Holder
shall  be  deemed  to  be  the  holder  of  record of the shares of Common Stock
issuable upon such exercise, notwithstanding that certificates representing such
shares  of Common Stock shall not then be actually delivered to the Holder.  The
issuance  of  certificates  for shares of Common Stock upon the exercise of this
Warrant  shall  be  made  without  charge  to the Holder for any issuance tax in
respect  thereof  (with  the  exception  of  any  federal  or state income taxes
applicable  thereto),  all  such  taxes  to  be  paid  by  the Company, it being
understood however that the Holder shall be required to pay any tax which may be
payable  in respect of any transfer involved in the issuance and delivery of any
certificate  in  a  name  other than that of the Holder.  The Company will at no
time  close  its  transfer  books  against  the  transfer of this Warrant or the
issuance  of  any  shares  of  Common  Stock  issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.

     2. Reservation of Shares;  Stock Fully Paid. The Company agrees that at all
        ----------------------------------------
times there shall be authorized  and reserved for issuance upon exercise of this
Warrant  such  number of shares of its  Common  Stock as shall be  required  for
issuance or delivery  upon  exercise of this  Warrant.  All shares  which may be
issued  upon  exercise  hereof  will,  upon  issuance,  and  receipt  of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.

     3. Fractional Shares.  This Warrant shall not be exercisable in such manner
        -----------------
as to require the issuance of fractional  shares.  If, as a result of adjustment
in the  Exercise  Price or the number of shares of Common  Stock to be  received
upon  exercise of this  Warrant,  fractional  shares would be issuable,  no such
fractional  shares shall be issued.  In lieu thereof,  the Company shall pay the
Holder an amount in cash equal to such  fraction  multiplied  by the Fair Market
Value of a share of Common Stock. The term "Fair Market Value" shall mean, as of
a particular date, the market price on such date.

          For purposes of this Warrant, the market price on any day shall be the
last  sale price on such day on the NASDAQ Stock Market, or, if the Common Stock
is  not  then  listed or admitted to trading on the NASDAQ Stock Market, on such
other  principal  stock exchange  on which such stock is then listed or admitted
to  trading,  or,  if  no sale takes place on such day on any such exchange, the
average  of the closing bid and asked prices on such day as officially quoted on
any  such  exchange,  or,  if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the reported closing bid and asked
prices  on  such  day  in  the over-the-counter market as quoted on the National
Association  of  Securities  Dealers  Automated  Quotation  System or, if not so
quoted,  then  as  furnished  by  any  member  of  the  National  Association of
Securities  Dealers,  Inc.  selected  by  the  Company.  If  there  shall  be no
meaningful over-the-counter market, then Fair Market Value shall be such amount,
not  less than book value, as may be determined by the Board of Directors of the
Company.

     4. Exchange or Assignment of Warrant.  This Warrant is exchangeable without
        ---------------------------------
expense (other than applicable transfer taxes) at the option of the Holder, upon
presentation  and  surrender  hereof to the  Company  for any other  Warrants of
different  denominations  entitling  the  holder  thereof  to  purchase  in  the
aggregate  the same  number of shares of  Common  Stock  purchasable  hereunder.
Subject to the  provisions of Section 12 below and any  restriction  on transfer
applicable  hereto  pursuant to the securities  laws of the United States or any
State,  upon  surrender of this Warrant to the Company with an  assignment  form
duly executed,  and funds sufficient to pay any transfer tax, the Company shall,
without  charge,  execute and deliver a new Warrant in the name of the  assignee
named in such  instrument  of  assignment,  and this Warrant  shall  promptly be
cancelled. This Warrant may be divided or combined with other Warrants which

<PAGE>
carry  the  same  rights upon presentation hereof at the principal office of the
Company,  together  with a written notice specifying the names and denominations
in  which  new  Warrants are to be issued signed by the Holder hereof.  The term
"Warrant"  as  used  herein includes any Warrants into which this Warrant may be
divided  or  exchanged, and the term "Holder" as used herein includes any holder
of  any Warrant into which this Warrant may be divided or for which this Warrant
may  be  exchanged.

     5.  Rights of the  Holder.  The Holder  shall  not,  by virtue  hereof,  be
         ---------------------
entitled  to any rights of a  stockholder  in the  Company,  either at law or in
equity,  and the  rights of the Holder are  limited to those  expressed  in this
Warrant.

     6.  Adjustment of Exercise Price and Number of Shares.  The number and kind
         -------------------------------------------------
of securities  purchasable upon the exercise or exchange of this Warrant and the
Exercise  Price  shall be  subject  to  adjustment  from  time to time  upon the
occurrence of certain events, as follows:

     (a) Adjustment  for Change in Capital Stock.  If at any time after the date
         ---------------------------------------
hereof, the Company:

          (A)  pays a dividend or makes a  distribution  on its Common  Stock in
               shares of its Common Stock;

          (B)  subdivides its outstanding  shares of Common Stock into a greater
               number of shares;

          (C)  combines  its  outstanding  shares of Common Stock into a smaller
               number of shares;

          (D)  makes a distribution on its Common Stock in shares of its capital
               stock other than Common Stock; or

          (E)  issues by  reclassification of its Common Stock any shares of its
               capital stock;

then  the number and kind of securities purchasable upon exercise or exchange of
this  Warrant  and the Exercise Price in effect immediately prior to such action
shall  each be adjusted so that the Holder may receive upon exercise or exchange
of  this  Warrant and payment of the same aggregate consideration, the number of
shares  of  capital  stock  of  the  Company  which  the Holder would have owned
immediately  following  such action if the Holder had exercised or exchanged the
Warrant  immediately  prior  to  such  action.

     The  adjustment shall become effective immediately after the record date in
the  case of a dividend or distribution and immediately after the effective date
in  the  case  of  a  subdivision,  combination  or  reclassification.

     (b)  Adjustment  for  Other  Distributions.  If at any time  after the date
          -------------------------------------
hereof,  the Company  distributes  to all holders of its Common Stock any of its
assets or debt securities, the Exercise Price following the record date shall be
adjusted in accordance with the following formula:

                    E' = E    x  M-F
                                 ---
                                  M

where:    E'  =  the  adjusted  Exercise  Price.

              E  =  the  Exercise  Price  immediately prior to  the  adjustment.

<PAGE>
              M  =  the  current  market  price  (as defined in (e)  below)  per
                    share  of  Common  Stock  on  the  record  date  of  the  
                    distribution.

              F  =  the aggregate fair market value (as conclusively  determined
                    by the Board of Directors of the Company) on the record date
                    of  the  assets or debt securities to be distributed divided
                    by  the  number of outstanding shares  of  Common  Stock.

     The adjustment shall be made successively whenever any such distribution is
made  and  shall  become  effective  immediately  after  the record date for the
determination  of  shareholders  entitled  to  receive the distribution.  In the
event  that  such  distribution  is  not actually made, the Exercise Price shall
again  be  adjusted to the Exercise Price as determined without giving effect to
the  calculation  provided  hereby.  In  no  event  shall  the Exercise Price be
adjusted  to  an  amount  less  than  zero.

     This subsection does not apply to cash dividends or cash distributions paid
out  of  consolidated  current or retained earnings as shown on the books of the
Company  and  paid  in  the  ordinary  course  of  business.

     (c)     Deferral  of  Issuance  or  Payment.  In any case in which an event
             -----------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be  made  effective  as  of a record date, the Company may elect to defer making
such  adjustment  until  the occurrence of such event.  If the Company so defers
making  any  such  adjustment and if this Warrant is exercised after such record
date  but  before  the  occurrence of such event, the shares of Common Stock and
other  capital  stock  of  the Company, if any, issuable upon such exercise, had
such  adjustment  been  made as of the record date, over and above the shares of
Common  Stock  or other capital stock of the Company, if any, issuable upon such
exercise  on  the  basis  of  the  Exercise Price as unadjusted, shall be issued
promptly  upon  the  occurrence  of  such event and the Company shall pay to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to  Section  3.

     (d)     When  No  Adjustment  Required.  No  adjustment  need be made for a
             ------------------------------
change  in  the  par  value  or  no  par  value  of  the  Common  Stock.

     (e)     Statement  of  Adjustments.  Whenever the Exercise Price and number
             --------------------------
of  shares  of  Common Stock purchasable hereunder is required to be adjusted as
provided  herein, the Company shall promptly prepare a certificate signed by its
President  or  any  Vice  President  and  its  Treasurer or Assistant Treasurer,
setting  forth,  in  reasonable  detail, the event requiring the adjustment, the
amount  of  the  adjustment,  the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of shares
of  Common  Stock  purchasable hereunder after giving effect to such adjustment,
and shall promptly cause copies of such certificates to be mailed to the Holder.

     (f)     No  Adjustment  Upon Exercise of Warrants.  No adjustments shall be
             -----------------------------------------
made  under  any Section herein in connection with the issuance of Warrant Stock
upon  exercise  or  exchange  of  the  Warrants.

     (g)     No  adjustment  for Small Amounts.  Anything herein to the contrary
             ---------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the amount
of  such  adjustment  shall  be  less than $.05 per share, but in such case, any
adjustment  that  would  otherwise  be required then to be made shall be carried
forward  and  shall  be  made  at the time and together with the next subsequent
adjustment  which, together with any adjustment so carried forward, shall amount
to  $.05  per  share  or  more.

<PAGE>
     (h)     Common  Stock  Defined.  Subject  to  the  provisions  of Section 7
             ----------------------
hereof,  shares  issuable  upon  exercise  or exchange hereof shall include only
shares  of  the  class  designated as Common Stock of the Company as of the date
hereof  or shares of any class or classes resulting from any reclassification or
reclassifications  thereof  or  as  a  result of any corporate reorganization as
provided  for  in  Section  7  hereof.

     7. Reclassification,  Reorganization, Consolidation or Merger. In the event
        ----------------------------------------------------------
of any reclassification,  capital  reorganization or other change of outstanding
shares of Common Stock of the Company  (other than a subdivision  or combination
of the outstanding  Common Stock and other than a change in the par value of the
Common Stock) or in the event of any consolidation or merger of the Company with
or into another  corporation (other than a merger in which merger the Company is
the  continuing  corporation  and that does not result in any  reclassification,
capital  reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise or exchange of this Warrant) or in the event of
any sale, lease,  transfer or conveyance to another  corporation of the property
and assets of the Company as an entirety or  substantially  as an entirety,  the
Company shall,  as a condition  precedent to such  transaction,  cause effective
provisions  to be made so that the Holder  shall have the right  thereafter,  by
exercising this Warrant,  to purchase the kind and amount of shares of stock and
other   securities  and  property   (including   cash)   receivable   upon  such
reclassification,   capital  reorganization  and  other  change,  consolidation,
merger,  sale or  conveyance by a holder of the number of shares of Common Stock
that  might  have been  received  upon  exercise  or  exchange  of this  Warrant
immediately  prior to such  reclassification,  capital  reorganization,  change,
consolidation,  merger,  sale or conveyance.  Any such  provision  shall include
provisions  for  adjustments  in  respect  of such  shares  of stock  and  other
securities and property that shall be as nearly equivalent as may be practicable
to the  adjustments  provided for in this Warrant.  The foregoing  provisions of
this Section 7 shall  similarly apply to successive  reclassifications,  capital
reorganizations  and  changes  of  shares  of  Common  Stock  and to  successive
consolidations,  mergers, sales or conveyances.  In the event that in connection
with any such capital reorganization or classification,  consolidation,  merger,
sale or  conveyance,  additional  shares  of  Common  Stock  shall be  issued in
exchange, conversion,  substitution or payment, in whole or in part, for, or of,
a security  of the  Company  other than  Common  Stock,  any such issue shall be
treated as an issue of Common Stock covered by the  provisions of subsection (a)
of Section 6.

     8. Notice to Warrant Holders. So long as this Warrant shall be outstanding,
        -------------------------
(i) if the  Company  shall pay any  dividend or make any  distribution  upon its
Common Stock,  or (ii) if the Company shall offer to the holders of Common Stock
for  subscription  or purchase by them any shares of stock or  securities of any
class  or any  other  rights,  or  (iii) if any  capital  reorganization  of the
Company,  reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially  all of the assets of the Company,  or voluntary or involuntary
dissolution or  liquidation of the Company shall be effected,  then, in any such
case,  the Company shall cause to be mailed to the Holder,  at least thirty (30)
days  prior to the date  specified  in (x) or (y)  below,  as the case may be, a
notice  containing a brief  description  of the proposed  action and stating the
date on which  (x) a record  is to be taken for the  purpose  of such  dividend,
distribution   or  rights,   or  (y)  such   reclassification,   reorganization,
consolidation,  merger, conveyance,  dissolution or liquidation is to take place
and the date, if any is to be fixed,  as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for securities
or  other  property  deliverable  upon  such  reclassification,  reorganization,
consolidation, merger, conveyance, dissolution or liquidation.

     9. Certain Obligations of the Company.  The Company agrees that it will not
        ----------------------------------
increase the par value of the shares of Warrant Stock  issuable upon exercise of
this Warrant  above the  prevailing  and  currently  applicable  Exercise  Price
hereunder,  and that before  taking any action  that would  cause an  adjustment
reducing the prevailing and current applicable Exercise Price

<PAGE>
hereunder  below  the  then  par value of the Warrant Stock at the time issuable
upon  exercise  of this Warrant, the Company will take such corporate action, as
in  the  opinion  of its counsel, may be necessary in order that the Company may
validly  issue  fully  paid,  nonassessable  shares  of such Warrant Stock.  The
Company  will  maintain  an  office  or  agency  (which  shall  initially be the
Company's  principal office in Redwood City, California) where presentations and
demands  to  or upon the Company in respect of this Warrant may be made and will
give  notice  in  writing  to  the  registered  holders  of the then outstanding
Warrants,  at  their  addresses  as  shown  on the books of the Company, of each
change  of  location  thereof.

     10. Repurchase Right. Notwithstanding any other provisions of this Warrant,
         ----------------
the Company may, in the event that the average  trading  price of the  Company's
Common Stock,  as reported on the NASDAQ  SmallCap Market or such other exchange
on which the  Company's  Common Stock may then be quoted,  exceeds  $10.00 for a
period of twenty (20)  consecutive  trading days, upon not less than thirty (30)
days'  notice in writing to the  Holder,  repurchase  all or any portion of this
Warrant  at a purchase  price  equal to $.10 per share of Common  Stock  covered
hereby, such purchase price to be proportionally adjusted each time the Exercise
Price is  adjusted  pursuant  to Section 6 hereof.  During  such thirty (30) day
period, the Holder may exercise such Warrants or a portion thereof in accordance
with the terms hereof.  The closing on such  repurchase  shall occur on the date
and at the time set forth in such notice at the office of the Company in Redwood
City,  California  or at such other place as shall be agreed upon by the Company
and the  Holder.  At the  Closing,  the Company  shall  deliver to the Holder an
amount equal to the purchase price in immediately available funds and the Holder
will  deliver this  Warrant to the Company for  cancellation.  To the extent any
repurchase  hereunder  is of less  than all of the  rights  represented  by this
Warrant,  the  Company  will  deliver to the Holder a new Warrant  covering  the
rights not so purchased.

     11. Determination by Board of Directors. All determinations by the Board of
         -----------------------------------
Directors of the Company  under the  provisions  of this Warrant will be made in
good faith with due regard to the interest of the Holder and in accordance  with
sound financial practices.

     12. Notice. All notices to the Holder shall be in writing,  and all notices
         ------
and certificates given to the Holder shall be sent registered or certified mail,
return receipt requested, to such Holder at his address appearing on the records
of the Company.

     13.  Replacement of Lost,  Stolen,  Destroyed or Mutilated  Warrants.  Upon
          ---------------------------------------------------------------
receipt of evidence  reasonably  satisfactory to the Company of the loss, theft,
destruction  or  mutilation  of this  Warrant and, in the case of any such loss,
theft or  destruction,  upon delivery of any indemnity  bond in such  reasonable
amount as the Company may determine in the case of any such mutilation, upon the
surrender of such  Warrant for  cancellation,  the Company at its expense,  will
execute  and  deliver,  in lieu of such lost,  stolen,  destroyed  or  mutilated
Warrant, a new Warrant of like tenor.

     14.  Number and Gender.  Whenever the singular  number is used herein,  the
         ------------------
same shall include the plural where  appropriate,  and words of any gender shall
include each other gender where appropriate.

<PAGE>
     15.  Applicable  Law.  This Warrant  shall be governed by, and construed in
          ---------------
accordance  with,  the laws of the  State of New  York,  without  regard  to its
conflict of laws principles.


                                   PENN  OCTANE  CORPORATION


                                   By:
                                   ---------------------------------
                                   Name:  Jerome  B.  Richter
                                   Title:  Chairman,  President  and
                                   Chief  Executive  Officer

Dated  as  of  December  1,  1998


<PAGE>
                                  PURCHASE FORM
                                  -------------


                                                         Dated __________ , ____


          The  undersigned  hereby  irrevocably  elects  to  exercise the within
Warrant  to purchase ___________ shares of Common Stock and hereby makes payment
of  $____________  in  payment  of  the  exercise  price  thereof.



          Signature______________________________




<PAGE>