PURCHASE  AGREEMENT
                               -------------------


     THIS  PURCHASE  AGREEMENT  made and entered into as of December14, 1998, by
and  between  KFP  Grand LTD., a Texas limited partnership (the "Purchaser") and
Penn  Octane  Corporation,  a  Delaware  corporation  (the  "Company").

     WHEREAS,  the  Company  wishes to sell and the Purchaser wishes to purchase
(i)  500,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company ("Common Stock"), and (ii) a warrant, exercisable until December 13,
2003  at  $1.75  per  share of Common Stock (subject to adjustment), to purchase
300,000  shares (the "Warrant Shares") of Common Stock substantially in the form
of  Exhibit  1  hereto  (the  "Warrant"; the Shares and the Warrant being herein
collectively  referred  to  as  the  "Securities");  and

     WHEREAS,  the Company and the Purchaser desire to enter into a Registration
Rights  Agreement  with  respect  to  the  Shares  and  the  Warrant  Shares,
substantially  in the form annexed as Exhibit 2 hereto (the "Registration Rights
Agreement"),  all  on  the  terms  and  conditions  set  forth  herein;

     NOW,  THEREFORE,  in consideration of the agreements and obligations herein
contained,  the  Purchaser  and  the  Company  hereby  agree  as  follows:

     1.     Purchase and Sale  of  the  Securities.  Subject  to the  terms  and
            ----------------------------------------
conditions  set  forth in this  Agreement,  the  Company  agrees  to sell to the
Purchaser, and the Purchaser agrees to purchase from the Company, the Securities
for a purchase price equal to Five Hundred Thousand ($500,000.00) Dollars.

     2.     The  Closing.  The  closing (the "Closing") of the purchase and sale
            ------------
of the Securities shall take place on December 14, 1998 at 10:00 A.M. local time
at the offices of the Company in Redwood City, California, or at such other time
and  place  as  the  Company shall specify.  At the Closing, the Purchaser shall
deliver to the Company payment for the Securities being purchased in immediately

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available  funds  and the Company shall deliver the Warrant to the Purchaser and
within  seven  business  days  thereafter,  the  Company  shall  deliver a stock
certificate  representing  the  Shares  to  the  Purchaser.

     3.     Registration  Rights.  The  Purchaser  shall  have such registration
            --------------------
rights  with respect to the Share and the Warrant Shares as are set forth in the
Registration  Rights  Agreement.

     4.     Representations  and  Warranties of the Company.  As of the Closing,
            -----------------------------------------------
the  Company  represents  and  warrants  that:

          (a)     the  Company is a corporation duly organized, validly existing
and  in  good  standing  under  the  laws  of the State of Delaware, and has the
requisite  corporate  power  and authority to execute and deliver this Agreement
and  to  perform  its  obligations  hereunder;

          (b) the execution,  delivery and  performance of this  Agreement,  the
sale and  delivery of the  Securities  and the sale and  delivery of the Warrant
Shares  pursuant  to the  Warrant  have been duly  authorized  by all  necessary
corporate  action on the part of the Company and do not violate the  Certificate
of Incorporation and by-laws of the Company, as amended and/or restated to date,
any law applicable to the Company,  or any covenant  contained in any agreement,
indenture,  mortgage,  promissory note, or other instrument to which the Company
is a party or to which the Company or its assets are subject.

          (c) the Shares,  when issued and paid for in accordance with the terms
of  this  Agreement,  will  be  legally  and  validly  issued,  fully  paid  and
nonassessable, free of preemptive rights and any other rights of others;

          (d) the Company has  reserved  for  issuance  upon the exercise of the
Warrant  the  number of shares of Common  Stock  equal to the  number of Warrant
Shares;

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          (e) the Warrant  Shares,  when issued upon exercise of the Warrant and
payment  therefore in accordance with the terms of the Warrant,  will be legally
and validly issued, fully paid and nonassessable,  free of preemptive rights and
any other rights of others; and

          (f) The  Company's  annual report on Form 10-K for the year ended July
31, 1998 and all documents incorporated therein by reference are true, complete,
and correct in all  material  respects,  do not contain  any  misstatement  of a
material fact or omit to state any material fact  necessary in order to make the
facts stated  therein,  in light of the  circumstances  in which such statements
were made, not misleading.

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     5.     Representations  and  Warranties  of  the  Purchaser.  The Purchaser
            ----------------------------------------------------
represents  and  warrants  as  follows:

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

               (ii)  Neither the Company nor any person  acting on behalf of the
Company has offered or sold the Securities to the Purchaser by means of any form
of general solicitation or general advertising.  The Purchaser 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  Company:
                  -------------------------------------

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

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

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               (iii) The Purchaser  has made,  either alone or together with his
advisors  (if  any),  such  independent   investigation  of  the  Company,   its
management, and related matters as the Purchaser deems to be, or the Purchaser's
advisors (if any) have advised to be,  necessary or advisable in connection with
this  investment;  and the Purchaser and its advisors (if any) have received all
information and data which the Purchaser 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  Purchaser  understands  that  all  the  Purchaser's
representations  and  warranties  contained  in this Agreement will be deemed to
have  been  reaffirmed  and  confirmed  as  of  the  Closing.

               (v)     The  Purchaser  understands  that  the  purchase  of  the
Securities  involves  various risks, including the risk that it is unlikely that
any  market  will  exist  for  any  resale of the Warrant and that resale of the
Shares,  the  Warrant  and  the  Warrant  Shares  will  be  restricted as herein
provided.

          (c)     Status  of  Purchaser:
                  ---------------------

               (i)     The  Purchaser  either alone or with Purchaser's 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 Purchaser has deemed it
appropriate to do so, the Purchaser has retained at Purchaser's own expense, and
relied  upon,  appropriate professional advice regarding the investment, tax and
legal  merits  and  consequences  of  this  Agreement and owning the Shares, the
Warrant  and  Warrant  Shares,  as  the  case  may  be.

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          (d)     Restrictions  on  Transfer  or  Sale
                  ------------------------------------

               (i)     The  Purchaser is acquiring the Securities and any shares
of  Common  Stock  purchased  upon  exercise  of  the Warrant solely for its own
account,  for  investment  purposes,  and  not  with a view to, or for resale in
connection  with,  any distribution of the Shares, the Warrant or such shares of
Common  Stock.  The  Purchaser  understands that neither the Shares, the Warrant
nor  such  underlying  shares  of  Common  Stock  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 Purchaser and of the other representations
made  by  the  Purchaser  in this Agreement.  The Purchaser understands that the
Company  is  relying  upon  the representations and agreements contained in this
Agreement  (and  any  supplemental  information)  for the purpose of determining
whether  this  transaction  meets  the  requirements  for  such  exemptions.

               (ii)     The  Purchaser  understands that the Shares, the Warrant
and  such  underlying  shares  of  Common  Stock  are  or will be upon issurance
"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  Purchaser  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
Company  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 Purchaser understands that under the Commission's rules, unless
disposed of pursuant to an effective registration statement under the Securities

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Act,  the  Purchaser may dispose of the Shares, Warrant and underlying shares of
Common  Stock  only  in  accordance  with  the  provisions of Rule 144 under the
Securities  Act,  to  the  extent  available, or in other transactions which are
exempt  from  registration under the Securities Act, in which the transferee may
acquire  "restricted securities" subject to the same limitations as in the hands
of  the  Purchaser.  As  a  consequence,  absent  such an effective registration
statement  under  the  Securities  Act, the Purchaser understands that it may be
required to bear the economic risks of the investment in the Securities (and the
underlying  Common  Stock)  for  an  indefinite  period  of  time.

               (iii)     The Purchaser agrees that (a) it will not sell, assign,
pledge,  give, transfer, of otherwise dispose of the Shares, the Warrant or such
underlying  Common  Stock 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 Purchaser
satisfactory to the Company (which requirement may be waived by the Company upon
advice of counsel), is exempt from the registration provisions of the Securities
Act  and  any  applicable State Securities Laws; (b) the Shares, the Warrant and
any  certificate(s)  representing shares of Common Stock issued upon exercise of
the  Warrant  may  bear a legend making reference to the foregoing restrictions;
and  (c) the Company 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)     In  no  event  shall  any  sale,  assignment,  pledge or
transfer  of  the  Shares,  the  Warrant  or such underlying Common Stock by the
Purchaser  to  a transferee give rise to rights of any such transferee under the
Registration  Rights  Agreement.

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     6.     Conditions  to  Obligations  of  Purchaser  and  the  Company.  The
            -------------------------------------------------------------
obligations  of  the  Purchaser to purchase and pay for the Securities specified
herein and of the Company to sell and deliver such Securities are subject to the
satisfaction  at  or prior to the Closing of the following conditions precedent:

          (a)     The representations and warranties of the Company contained in
Section  4  hereof  and  of the Purchaser contained in Section 5 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.

          (b)     The  Company  and  the  Purchaser  shall  each have received a
certificate  from  the General Partner of the Purchaser and an executive officer
of  the  Company,  respectively,  to  the  effect  that  its representations and
warranties  are  still  valid.

          (c)     The  Company  and  the  Purchaser shall each have executed and
delivered  the  Registration  Rights  Agreement.

     7.     Board  of Directors.     The Company agrees that the Purchaser shall
            --------------------
have  one  (1) seat on the Board of Directors.  The Company will cause the Board
of  Directors to elect the Purchaser's nominee to the Board of Directors as soon
as  practicable  after  the  purchase  and sale of the Securities is consummated
hereunder.  At  each  annual  stockholders  meeting  of  the  Company  after the
purchase  and  sale of the Securities is consummated hereunder, the Company will
cause  the  Purchaser's designee to be nominated as a part of management's slate
of  nominees  for election as directors.  The Company shall use its best efforts
to  ensure  the election of the Purchaser's nominee as a director of the Company
at  each  such  annual  meeting  of  the  stockholders  of  the  Company.

     8.     Waiver, Amendment.  Neither this Agreement nor any provisions hereof
            -----------------
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.

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     9.     Assignability.  Neither  this  Agreement  nor  any  right,  remedy,
            -------------
obligation  or  liability  arising  hereunder  or  by  reason  hereof  shall  be
assignable  by  either  the  Company  or the Purchaser without the prior written
consent  of  the  other party, which consent shall not be unreasonably withheld.

     10.     Applicable  Law.  This 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.

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

     12.     Counterparts.  This  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.

     13.     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)  If  to  the  Company,  to  it  at  the  following  address:

               Penn  Octane  Corporation
               900  Veterans  Boulevard,  Suite  240
               Redwood  City,  California  94603
               Attn:     Jerome  B.  Richter,
                    President

               with  a  copy  to:
               Coudert  Brothers
               1114  Avenue  of  the  Americas
               New  York,  New  York  10036
               Attn:  John  F.  Watkins,  Esq.

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          (b)  If  to  the  Purchaser,  at  the  following  address:

               KFP  Grand  Ltd.
               545  E.  John  Carpenter  Freeway,  Suite  1400
               Irving,  Texas  75062
               Attn:  Mahmood  Khimji
                    President

               With  a  copy  to:
               Hughes  &  Luce,  L.L.P.
               1717  Main  Street,  Suite  2800
               Dallas,  TX  75201
               Attn:  Dudley  Murrey

or  at  such  other  address  as  either party shall have specified by notice in
writing  to  the  other.

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

     IN  WITNESS  WHEREOF,  the  Company  and the undersigned have executed this
Agreement  as  of  this  14th  day  of  December,  1998.

                                   KFP  GRAND  LTD.


                                   By:
                                        ----------------------------------------
                                        Mahmood  Khimji
                                        President


                                   PENN  OCTANE  CORPORATION


                                   By:
                                        ----------------------------------------
                                        Jerome  B.  Richter
                                        President  and  Chief  Executive Officer

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