EXHIBIT A
                                                                       ---------

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


     THIS COLLATERAL AGREEMENT ("Collateral Agreement") is entered into this 1st
day  of  December  1998,  by  and  among (i) Penn Octane Corporation, a Delaware
corporation, (the "Borrower"); (ii) each of the individual lenders identified on
the  signature  pages hereto (each a "Lender", and collectively, the "Lenders");
and  Castle  Energy  Corporation, as collateral agent  (the "Collateral Agent").

                              W I T N E S S E T H:
                              -------------------

     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  Corps  Christi  Court  of  Appeals;

     WHEREAS,  Borrower  has  represented  to  Lenders that International Energy
Development Corp. changed its name to Penn Octane Corporation but the caption of
the Judgment (as defined in the Assignment) continues to reflect the prior name.

     WHEREAS,  pursuant  to a Rollover and Assignment Agreement by and among the
Borrower  and  the  Lenders  of even date herewith ("Rollover Agreement") and an
Assignment  of Judgment Agreement between Borrower and Castle Energy Corporation
for  itself  and  as Collateral Agent for Lenders dated as of even date herewith
(the  "Assignment")  the  Borrower  has  assigned  in  trust  to  Castle  Energy
Corporation for itself and as Collateral Agent for the Lenders all of its right,
title  and  interest  in and to the Judgment and the Proceeds (as defined in the
Assignment);

     WHEREAS,  in  furtherance  of  the  Assignment,  the Borrower has agreed to
execute  and  deliver to Collateral Agent at Closing (as defined in the Rollover
Agreement) a letter to IBC, substantially in the form attached hereto as Annex 1
                                                                         -------
(the  "Payment  Instruction  Letter") instructing IBC to deliver the Proceeds in
trust  to  the  Collateral  Agent  for  deposit  in  the  Collateral Account (as
hereinafter  defined);

     WHEREAS, the Borrower and the Lenders wish to appoint the Collateral Agent,
and the Collateral Agent has agreed to establish a deposit account in trust (the
"Collateral  Account") and to act, as an administrator of the Collateral Account
upon  the  terms,  conditions  and  provisions  hereinafter  set  forth;  and

<PAGE>
     WHEREAS,  the  Borrower  and  the Lenders desire to set forth the terms and
conditions  pursuant  to  which  the Collateral Agent shall pay out any Proceeds
delivered  to  the Collateral Agent and/or deposited into the Collateral Account
during  the  term  of  this  Agreement.

     NOW,  THEREFORE,  in  consideration  of  the  mutual promises and covenants
contained  herein  and  other  good  and valuable consideration, the receipt and
sufficiency  of which are hereby acknowledged, and intending to be legally bound
hereby,  it  is  hereby  agreed  among  the  parties  hereto  as  follows:

1.   Defined  Terms
     --------------

     All  capitalized  terms used herein, unless otherwise defined herein, shall
have  the respective meanings ascribed to them in the Rollover Agreement and are
incorporated  herein  by  reference.

2.   Appointment  of  the  Collateral  Agent
     ---------------------------------------

     2.1 The Borrower and the Lenders hereby designate the Collateral Agent, and
the Collateral Agent hereby agrees to act, as an administrator of the Collateral
Account in trust, upon the terms and conditions set forth herein.

     2.2 The Collateral Agent's duties and responsibilities,  in its capacity as
such,  shall  be  limited  to  those  expressly  set  forth  in this  Collateral
Agreement,  and the  Collateral  Agent  shall not be subject  to, nor obliged to
recognize,  any other  agreement  between any or all of the parties  hereto even
though  reference  thereto  may  be  made  herein,  except  to the  extent  that
definitions  contained  in the  Rollover  Agreement  are  incorporated  in  this
Collateral  Agreement.  This Collateral Agreement may not be amended at any time
in  such  a  way  as  to  affect  the  rights,  responsibilities,   obligations,
liabilities or fees of the Collateral  Agent except with the Collateral  Agent's
prior written  consent,  as evidenced by an instrument in writing  signed by all
the parties hereto.

     2.3 The Collateral  Agent, in its capacity as such, shall disregard any and
all notices or directions  given by any of the  Borrower,  the Lenders or by any
other  person,  firm or  corporation,  except (i) such notices,  directions  and
instructions as are specifically  provided for herein,  (ii) joint  instructions
received in writing  from the  Borrower  and the Lenders and (iii) a Final Order
(as hereinafter defined) of a court of competent  jurisdiction.  If any property
subject hereto is at any time  attached,  garnished or levied upon under a Final
Order of a court of competent jurisdiction,  or in case the payment, assignment,
transfer,  conveyance  or  delivery  of any such  property  shall be  stayed  or
enjoined by a Final  Order of a court of  competent  jurisdiction,  or in case a
Final  Order  of a court of  competent  jurisdiction  shall  be made or  entered
affecting such property or any part thereof,  then and in any of such events the
Collateral  Agent is  authorized  to rely upon and comply  with any such  order,
writ,  judgment or decree of any court which is not subject to further review or
appeal (a "Final Order").

     2.4 In the event that the  Collateral  Agent shall be  uncertain  as to its
duties or actions hereunder,  or shall receive instructions from the Borrower or
the Lenders which, in the opinion of the Collateral  Agent, are in conflict with
any of the  provisions  of this  Collateral  Agreement,  it shall be entitled to
maintain the Collateral Account and may decline to take any further action until
the Collateral Agent receives joint written  instructions  from the Borrower and
the Lenders  directing the disbursement of all or any portion of such Collateral
Account, in which case the Collateral Agent shall then make such disbursement in
accordance with such instructions.  Should any dispute arise with respect to the

                                        2
<PAGE>
payment,  ownership or right of  possession  of any proposed  disbursement,  the
Collateral Agent is authorized and directed to retain in its possession, without
liability to anyone,  all or any part of such proposed  disbursement  until such
dispute  shall  have been  settled  either by mutual  agreement  of the  parties
concerned or by a Final Order, provided that the Collateral Agent shall be under
no duty whatsoever to institute or defend any such  proceedings,  and,  provided
further,  that if any such dispute  continues  for more than one hundred  twenty
(120) days, the Collateral Agent may, in its discretion,  upon written notice to
the Borrower and the Lenders, interplead the Collateral Account (or that portion
thereof  which  is  the  subject  of  such  dispute)  to a  court  of  competent
jurisdiction (subject to the provisions of Section 7.4 hereof).
                                           -----------

     2.5 It is understood and agreed that the Collateral Agent shall:

          (a) be under no duty to accept notices or instructions from any person
     other than as expressly provided for in this Collateral Agreement;

          (b)  be  protected  in  acting  upon  any  notice,  opinion,  request,
     certificate,  approval, consent or other document reasonably believed by it
     to be genuine and what it purports to be;

          (c) be deemed  conclusively  to have  given and  delivered  any notice
     required  to be given or  delivered  hereunder  if the same is in  writing,
     signed by any one of its authorized  officers and (i) mailed, by registered
     or certified mail, return receipt requested, postage prepaid, (ii) sent via
     expedited   courier   service  that  regularly   requires  signed  receipts
     evidencing delivery, or (iii) hand delivered, in a sealed wrapper, manually
     receipted for by the addressee, in each case to the Borrower or the Lenders
     at the addresses set forth in Section 7.3 hereof;
                                   -----------

          (d) be protected,  indemnified and held harmless jointly and severally
     by the Borrower and the Lenders (other than Castle Energy Corporation) from
     and against any claim made against it by reason of its acting or failing to
     act in  connection  with any of the  transactions  contemplated  hereby and
     against any loss, liability or expense, including attorneys' fees and other
     reasonable  expenses of defending  itself against any claim of liability it
     may sustain in carrying out the terms of this Collateral Agreement,  except
     for claims which are  successfully  asserted  against the Collateral  Agent
     based upon the  Collateral  Agent's  failure  to comply  with the terms and
     conditions of this Collateral  Agreement or the bad faith, gross negligence
     or willful misconduct of the Collateral Agent; provided,  however, that (i)
     promptly after the receipt by the Collateral  Agent of notice of any demand
     or claim or the  commencement of any such action,  suit or proceeding,  the
     Collateral  Agent  shall  notify  all  parties  hereto  in  writing  of the
     existence of such demand, claim, action, suit or proceeding; (ii) the other
     parties  hereto  shall be entitled,  jointly or severally  and at their own
     expense,  to participate in and assume the defense of any such action, suit
     or proceeding;  and (iii) the aforesaid indemnity obligations shall survive
     the  termination  of this  Collateral  Agreement or the  resignation of the
     Collateral Agent;

          (e) have no  liability in respect of or duty to inquire into the terms
     and conditions of the Rollover  Agreement (except to the extent that any of
     the defined terms contained in the Rollover  Agreement are  incorporated in
     this Collateral  Agreement) or any other document or agreement  executed in
     connection  with or pursuant to the  Rollover  Agreement,  its duties under
     this Collateral Agreement being understood by the parties to be ministerial
     in nature;

                                        3
<PAGE>
          (f) be  permitted  to consult  with  counsel  of its  choice  which is
     experienced  in legal  matters of a nature  similar to those  arising under
     this  Collateral  Agreement,  and shall not be liable for any action taken,
     suffered  or omitted by it in good faith in  accordance  with the advice of
     such counsel; provided,  however, that nothing contained in this subsection
     (f), nor any action taken by the Collateral Agent or by such counsel, shall
     relieve  the  Collateral  Agent from  liability  for any  claims  which are
     occasioned  by its failure to comply with the terms and  conditions of this
     Collateral  Agreement  or  the  bad  faith,  gross  negligence  or  willful
     misconduct of the Collateral Agent, as provided in subparagraph (d) above;

          (g)  not  be  bound  by  any  modification,   amendment,  termination,
     cancellation,  rescission or  supersession  of this  Collateral  Agreement,
     unless the same shall be in writing and signed by the  Borrower and each of
     the Lenders and notice thereof is provided to the Collateral Agent,  except
     to  the  extent  that  any  such  modification,   amendment,   termination,
     cancellation,    rescission   or    supersession    affects   the   rights,
     responsibilities,  obligations, liabilities or fees of the Collateral Agent
     hereunder, in which case any document or instrument reflecting such changes
     shall also be signed by the Collateral Agent;

          (h) be entitled to refrain  from taking any action  other than to keep
     the Proceeds received by it in escrow until  disbursement  thereof pursuant
     to Section  4.1 of this  Agreement,  or it shall be directed  otherwise  in
     writing by the Borrower and the Lenders, or by a Final Order; and

          (i) be  granted  a  security  interest  in and lien on the  Collateral
     Account  for the  benefit of itself  and the  Lenders  in its  capacity  as
     Collateral  Agent hereunder.  This paragraph shall survive  notwithstanding
     any  termination  of this  Collateral  Agreement or the  resignation of the
     Collateral Agent.

     2.6 From time to time on or after the date  hereof,  the  Borrower  and the
Lenders  shall  deliver or cause to be  delivered to the  Collateral  Agent such
further documents and instruments, or cause to be done such further acts, as the
Collateral  Agent may request in order to enable the  Collateral  Agent to carry
out more  effectively the provisions and purposes of this Collateral  Agreement,
to evidence  compliance with this Collateral  Agreement or to assure itself that
it is reasonably protected in acting under this Collateral Agreement.

          (a) For its services hereunder, the Collateral Agent shall be entitled
     to be paid by the Borrower a one-time  acceptance fee in an amount equal to
     One Dollar  ($1.00),  payable in advance,  commencing with the execution of
     this Collateral Agreement.

          (b) The  foregoing  fee,  together with the  reasonable  out-of-pocket
     expenses  incurred by the  Collateral  Agent in performing its duties under
     this  Collateral  Agreement,  shall be borne by the Borrower.  The Borrower
     hereby agrees to indemnify and hold the Lenders harmless,  from and against
     all  losses  or  damages  arising  out of a breach by the  Borrower  of its
     obligations under this Section 2.7.
                            ------------

3.   Establishment  of  Collateral  Account
     --------------------------------------

     3.1  Simultaneously  with the execution of this Collateral  Agreement,  the
Borrower will deliver to the Collateral  Agent Ten Dollars  ($10.00) which is to
be deposited into a separate interest bearing deposit account in the name of the
Collateral  Agent as the sole signatory (as so constituted  and as the amount of
such  Collateral  Account may  increase or be  supplemented  by any  Proceeds or
interest  thereon or pursuant to the Payment  Instruction  Letter or pursuant to

                                        4
<PAGE>
the  provisions  hereof,  the  "Collateral  Account").  Collateral  Agent  shall
                                -------------------
disburse funds from the Collateral  Account in accordance with the terms of this
Collateral Agreement.  Borrower agrees to execute, deliver and cause to be filed
any and all documents that may be required to evidence,  perfect or continue the
perfection  of the  Collateral  Agent's  security  interest  in and  lien on the
Collateral Account and the funds therein.

4.   Disposition  of  Collateral  Account
     ------------------------------------

     4.1 As promptly as possible after the deposit and clearance of any Proceeds
into the Collateral  Account  pursuant to the Payment  Instruction  Letter,  the
Collateral  Agent shall disburse such Proceeds from the Collateral  Account,  in
the following amounts and according to the following priority:

          (a) First, to the law firm of Patton Boggs,  L.L.P.  ("Patton  Boggs")
     for  fees  and  expenses  incurred  in  connection  with  the  Judgment,  a
     particular  amount not to exceed One Million Two Hundred  Thousand  Dollars
     ($1,200,000.00) as such particular amount shall be directed by the Borrower
     in writing to the Collateral Agent (the "Patton Boggs Payment");

          (b) Second, to Thomas A. Serleth, an amount equal to five percent (5%)
     of the Judgment net of the Patton  Boggs  Payment,  as such amount shall be
     directed by the Borrower in writing to the Collateral Agent;

          (c) Third, to Castle Energy Corporation for payment of its legal fees,
     costs and  expenses  (which  Borrower  hereby  agrees to pay)  incurred  in
     connection  with the  negotiation,  preparation,  documentation  of  and/or
     exercise of rights under the Rollover Agreement, this Collateral Agreement,
     the Assignment, the Amended Notes, the Warrants and the Registration Rights
     Agreement  provided,  however,  that the amount so paid in connection  with
     such  negotiation,   preparation  and/or  documentation  shall  not  exceed
     $30,000.

          (d) Fourth, to each of the Lenders in the respective principal amounts
     set  forth on  Schedule  I hereto  plus all  interest  accrued  thereon  as
     provided in each Lender's  Amended Note;  provided that if the Proceeds are
     not  sufficient  to pay the  Loans  in  full,  then pro rata to each of the
                                                         --- ----
     Lenders based upon the outstanding  amount of their respective Loans at the
     time of payment;

          (e)  Fifth,  to  the  Collateral  Agent,  any  amounts  owing  to  the
     Collateral  Agent  pursuant  to this  Collateral  Agreement  other  than as
     specified in subsection (c) above; and

          (f)  Sixth,  to the  Borrower,  such  amount  as is  remaining  in the
     Collateral  Account after payment in full of each Lender's Amended Note and
     amounts  owing under  Sections 4.1 hereof or as otherwise  provided in this
     Collateral Agreement (the "Termination Date Escrow Balance").

     4.2 The Collateral  Agent shall provide  written notice pursuant to Section
                                                                         -------
7.3 hereof to each of the Lenders and the Borrower of the amount, date and payee
---
of any  distributions  to be made hereunder at least ten (10) days before making
any such  disbursement  pursuant  to Section  4.1.  For  purposes of the ten-day
notice periods  pursuant to this Section 4.2, each such period shall commence on
the date of such  notice  and  shall  terminate  at  midnight  on the  tenth day
thereafter.

                                        5
<PAGE>
     4.3 The party or  parties  receiving  a  disbursement  from the  Collateral
Account shall, upon request,  furnish to the Collateral Agent  concurrently with
its  receipt  of such  disbursement,  a signed  receipt  for the  amount of such
disbursement and, if applicable, documentary evidence reasonably satisfactory to
the Collateral Agent of such party's appointment, incumbency and authority.

     4.4 For purposes of determining the amount of interest owing to any Lender,
the Collateral Agent shall be entitled to rely on a copy of the Amended Note and
a sworn affidavit signed by the Borrower and such Lender.

5.   Lenders'  Rights
     ----------------

     The  Borrower  and each of the Lenders hereby acknowledge that neither this
Collateral  Agreement  nor  the Assignment shall in any way prejudice any of the
Lenders' rights to payment under the Rollover Agreement or the Amended Notes, or
any other amounts owing pursuant to any other agreement, note, or arrangement by
and  among  any of the Borrower and the Lenders, as the case may be, whatsoever.
The  Borrower  specifically acknowledges that this Collateral Agreement has been
established  for  purposes  of  effecting  the  equitable  distribution  of  any
Proceeds,  and  that this Collateral Agreement shall not be construed in any way
as  a  settlement, compromise or adjustment by any of the Lenders of any amounts
owed  to  them  by  the Borrower.  The Borrower hereby confirms, and the parties
hereto  acknowledge,  the  Borrower's assignment to the Collateral Agent for the
benefit of itself and the Lenders of all of Borrower's right, title and interest
in  and  to  the  Judgment  and  the  Proceeds.

6.   Term
     ----

     This  Collateral  Agreement  shall  continue  until  the earlier of (i) the
payment in full of all amounts owing to the Lenders under the Amended Notes, and
(ii)  payment into and disbursement out of the Collateral Account, in accordance
with  the  terms of this Collateral Agreement, of all Proceeds; in each case, as
evidenced  by written notice to such effect signed by each of the Lenders in the
form  requested by the Collateral Agent; whereupon this Collateral Agreement and
the  collateral arrangements created hereunder shall terminate (the "Termination
Date"),  and  the  Collateral  Agent  shall  be released and discharged from all
further duties and obligations hereunder, but without prejudice to any liability
of  the Collateral Agent for its failure to comply with the terms and conditions
of  this  Collateral  Agreement  or  its  bad faith, gross negligence or willful
misconduct  hereunder.  Each  of the Lenders agrees that, upon the occurrence of
either  of  the  events  specified in clause (i) or (ii) of this Section 6, such
Lender  shall  execute  a written notice in the form requested by the Collateral
Agent.

7.   Miscellaneous
     -------------

     7.1  (a) The Borrower and the Lenders may,  upon at least thirty (30) days'
     prior  written  notice to the  Collateral  Agent  executed  by all of them,
     dismiss the  Collateral  Agent  hereunder and appoint a successor.  In such
     event,  the Collateral  Agent shall promptly account for and deliver to the
     successor  collateral  agent named in such  notice the then  balance of the
     Collateral Account.  Upon acceptance thereof and of such accounting by such
     successor  collateral agent, and upon reimbursement to the Collateral Agent
     of all expenses due to it hereunder through the date of such accounting and
     delivery,  the Collateral Agent, in its capacity as such, shall be released
     and  discharged  from all of its  duties  and  obligations  hereunder,  but
     without  prejudice to any liability of the Collateral  Agent for failure to
     comply with the terms and  conditions of this  Collateral  Agreement or its
     bad faith, gross negligence or willful misconduct hereunder.

                                        6
<PAGE>
          (b)  (i) Without limiting the foregoing, the Collateral Agent (and any
     successor  collateral agent hereunder) shall have the right, as provided in
     Subsection  (ii)  below,  at any time to resign as such by  delivering  the
     Collateral Account to any successor  collateral agent jointly designated by
     the  Borrower  and all  Lenders in  writing,  or to any court of  competent
     jurisdiction,  whereupon  the  Collateral  Agent shall be discharged of and
     from any and all  further  obligations  arising  in  connection  with  this
     Collateral  Agreement,  but  without  prejudice  to  any  liability  of the
     Collateral Agent for its bad faith,  gross negligence or willful misconduct
     hereunder.

               (ii) The  resignation  of the  Collateral  Agent will take effect
     upon the  appointment of a successor  collateral  agent by the Borrower and
     all Lenders and delivery of the Collateral Account to such successor.

     7.2 This  Collateral  Agreement shall inure to the benefit of, and shall be
binding  upon,  the  parties  hereto  and their  respective  successors,  heirs,
remaindermen,  assigns,  executors,  administrators,  personal  representatives,
trustees and fiduciaries. The Collateral Agent shall have the right to rely upon
any  proper   evidence  of  the  authority  of  any  such   successors,   heirs,
remaindermen,  assigns,  executors,  administrators,  personal  representatives,
trustees  and  fiduciaries.  Notwithstanding  anything  to the  contrary  herein
contained,  no beneficial interest of any person in the Collateral Account shall
be  subject  to  anticipation  or  assignment  by such  person,  nor  shall  the
Collateral Account be subject to interference or control of any creditor of such
person, or be taken or reached by any legal or equitable process in satisfaction
of any debt or other  liability of such person prior to  disbursement,  and each
party hereby agrees to indemnify  the other parties in connection  with any loss
or diminution of such party's interest in the Collateral  Account as a result of
any such matter.

     7.3 Any notice,  direction,  instruction or other communication required or
permitted hereunder shall be given in writing by hand delivery, by registered or
certified first class mail,  return receipt  requested,  postage prepaid,  or by
expedited  courier service that regularly  requires  signed receipts  evidencing
delivery,  in each  case  addressed  to the  party  to  receive  the same at its
respective  address set forth below,  or to such other address as such party may
have  designated  by notice to the others in accordance  with the  provisions of
this Section 7.3.
     ------------

                                        7
<PAGE>
          (i)  To the Borrower:

               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.

          (ii) If to a Lender,  at the address set forth  beneath such  Lender's
               name on Schedule I hereto; -----------

          (iii) To the Collateral Agent:

               Castle  Energy  Corporation
               One  Radnor  Corp.  Center
               100  Matsonford  Road,  Suite  250
               Radnor,  Pennsylvania  19087
               Attn:  Joseph  Castle,  President

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

     Copies of any written communications sent by the Borrower or the Lenders to
the  Collateral Agent relating to this Collateral Agreement shall be sent to the
other  parties  hereto,  and  copies  of  any written communications sent by the
Collateral  Agent  relating  to  this  Collateral Agreement shall be sent to the
Borrower  and  the Lenders.  Notwithstanding the foregoing, the Borrower and the
Lenders  shall  have  the right to engage in direct written communications among
themselves  relating  to  this  Collateral  Agreement  without  providing copies
thereof  to  the Collateral Agent, except to the extent otherwise required under
the  terms  of  this  Collateral  Agreement.

     All notices, directions, instructions and communications hereunder shall be
effective, and deemed given, if hand delivered, on and as of the date of receipt
thereof, as evidenced by a written receipt by or on behalf of the party to which
the same is so delivered, and, if mailed or sent by expedited courier, on and as
of  the date of delivery, as evidenced by the acknowledgement of delivery issued
with respect thereto by the applicable postal authorities or by the confirmation
of  delivery  issued  by  the  applicable  courier  service.

     7.4  (a)  The  parties  agree  that  this  Collateral  Agreement,  and  the
respective  rights,  duties and obligations of the parties  hereunder,  shall be
governed by, and  interpreted  in accordance  with, the laws of the State of New
York, without giving effect to principles of conflicts of law thereunder.

                                        8
<PAGE>
          (b) Each of the parties  hereby (i)  irrevocably  consents  and agrees
     that any  legal or  equitable  action  or  proceeding  arising  under or in
     connection with this Collateral  Agreement shall be brought  exclusively in
     any Federal or state court within the county of New York, New York, and any
     court to which an appeal may be taken in any such  litigation,  and (ii) by
     execution and delivery of this Collateral Agreement, irrevocably submits to
     and accepts with respect to any such action or proceeding, for such party's
     heirs,  beneficiaries  remaindermen,  personal representatives,  executors,
     administrators,  fiduciaries  and permitted  assigns and in respect of such
     party's  properties  and  assets,   generally  and   unconditionally,   the
     jurisdiction of the aforesaid  courts,  and irrevocably  waives any and all
     rights such party may now or hereafter have to object to such  jurisdiction
     under the constitution or laws of the State of New York or the Constitution
     or laws of the United States of America or  otherwise.  Each of the parties
     hereby  irrevocably  waives  any  right  it may  have  to a jury  trial  in
     connection with this Collateral Agreement.

     7.5 This Collateral Agreement,  and any notice, direction or other document
or instrument delivered in connection herewith, may be executed in counterparts,
each of which shall constitute an original instrument, but all of which together
shall constitute a single agreement,  notice, direction,  document or instrument
as the case may be. The Borrower and each of the Lenders agree to cooperate with
each other in good faith in joining in any notices or written  instructions that
are required to be delivered to the Collateral Agent jointly by the Borrower and
the Lenders.

     7.6 The  provisions of this  Collateral  Agreement  shall not be altered or
terminated  by operation  of law or by the  occurrence  of any event  (except as
otherwise  specified  herein),  including,  without  limitation,  the  death  or
incapacity or the termination of the legal existence of any party hereto.

     7.7 This Collateral Agreement shall not be assignable, in whole or in part,
by any party without the prior  written  consent of the other  parties,  and any
attempted  assignment  without such prior  written  consent shall be void except
that each Lender may assign its rights under this Collateral Agreement to any of
its affiliates or subsidiaries without the consent of any other party.

     7.8 This Collateral Agreement,  and any notice, direction or other document
or instrument delivered in connection herewith, may be executed in counterparts,
each of which shall constitute an original instrument, but all of which together
shall constitute a single agreement, notice, direction,  document or instrument,
as the case may be.

     7.9 This  Collateral  Agreement  may not be  amended  or  modified  nor any
provision  hereof waived except by an instrument in writing  signed by the party
against whom any amendment or modification or waiver is sought to be enforced.

     7.10 Any provision in this  Collateral  Agreement  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 of this Collateral Agreement.

                                        9
<PAGE>
     IN  WITNESS  WHEREOF,  the  Company  and the undersigned have executed this
Collateral  Agreement  as  of  this  1st  day  of  December,  1998.


                                   THE  BORROWER:

                                   PENN  OCTANE  CORPORATION


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


                                   CASTLE  ENERGY  CORPORATION,
                                   as  Collateral  Agent


                                   By:  _____________________________
                                   Name:
                                   Title:

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


                         LENDER:


                          ______________________________________
                                   Clint  Norton



                         SOUTHWEST  CONCEPT  INC.,
                         as  Lender


                         By:  ______________________________________
                              Name:
                              Title:



                         CASTLE  ENERGY  CORPORATION,
                         as  Lender


                         By:  _____________________________________
                              Name:
                              Title:

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

                              LENDER:


                              ___________________________________________
                                        James  F.  Meara,  Jr.


                              SEP  FBO  JAMES  F.  MEARA  IRA,
                              as  Lender

                              By:  Donaldson,  Lufkin  &  Jenrette  as
                                   Securities  Corporation  Custodian



                              By:  ________________________________
                              Name:
                              Title:

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

                    LENDER:

                    LINCOLN  TRUST  COMPANY  FBO  PERRY  D.  SNAVELY  IRA,
                    as  Lender


                    By:__________________________________
                    Name:
                    Title:

                                       13
<PAGE>
                                   SCHEDULE  I

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

Castle  Energy  Corporation      Principal amount of Amended Note: $1,000,000
c/o  CEC,  Inc.                  Accrued  interest  thereon  at  10% per annum
One Radnor Corporate Center      prior to an Event of Default, and 12% per annum
100 Matsonford Road, Suite 250   subsequent  to  an  Event of Default
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 Amended Note:  $90,000
1710 Dallas Parkway, Suite 120   Accrued  interest thereon at 10% per annum
Dallas, Texas 75248              prior to an Event of Default, and 12% per annum
(972)  931-8509                  subsequent  to  an  Event  of  Default


Southwest Concept Inc.           Principal amount of Amended Note:  $60,000
17110 Dallas Parkway, Suite 120  Accrued interest thereon at 10% per annum
Dallas, Texas 75248              prior to an Event of Default, and 12% per annum
Attn:  Clint  Norton             subsequent  to  an  Event  of  Default
(972)  931-8509

                                        2
<PAGE>
                                   SCHEDULE I


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

James F. Meara, Jr.               Principal amount of Amended Note: $75,000
8150 N. Central Expressway,#795   Accrued interest thereon at 10% per annum
Dallas, Texas 75206               prior to an Event of Default, and 12% per
                                    annum
(214)  692-7066                   subsequent  to  an  Event  of  Default


Donaldson  Lufkin  Jenrette       Principal  amount  of  Amended  Note: $75,000
Securities Corporation Custodian  Accrued  interest thereon at 10% per annum
SEP  FBO  James  F. Meara IRA     prior to an Event of Default, and 12% per
                                    annum
Pershing Division of Donaldson    subsequent  to  an  Event  of Default
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 Amended Note: $200,000
FBO Perry D. Snavely IRA         Accrued interest thereon at 10% per annum
P.O. Box 5831                    prior to an Event of Default, and 12% per annum
Denver,  Colorado  80217         subsequent  to  an  Event  of  Default
Attn:  Monique  Rice
(610) 260-6388

                                        4
<PAGE>
                                                                         ANNEX 1
                                                                         -------

                           PAYMENT INSTRUCTION LETTER

                    [Penn  Octane  Corporation  letterhead]


December  1,  1998





International  Bank  of  Commerce-Brownsville
630  East  Elizabeth  Street
Brownsville,  Texas  78520


                         Re:  Payment  Instructions
                              ---------------------

Ladies  and  Gentlemen:

     We  refer  you to the judgment confirming the arbitral award for $3,246,754
entered  against  the International Bank of Commerce-Brownsville in favor of the
Penn  Octane  Corporation  (the  "Company")  on  February  28, 1996 by the 197th
District  Court  in  and for Cameron County, Texas, which judgment was upheld by
the  Texas  Court  of  Appeals  on  June  18,  1998,  (the  "Judgment").

     We  note  that  IBC-Brownsville  has  filed  for  a  rehearing  of the case
underlying  the  Judgment by the Texas Court of Appeals, and that as of the date
set forth above, the Texas Court of Appeals has not ruled on the IBC-Brownsville
request  for  rehearing.

     The  Company  hereby notifies IBC-Brownsville that the Company has assigned
the  Judgment  and the proceeds thereof to Castle Energy Corporation ("CEC") for
itself  and on behalf of certain other lenders as more particularly described in
the  enclosed  Assignment  of  Judgment.

     In the event the Judgment becomes final and non-appealable, or is otherwise
settled by the Company and IBC-Brownsville, IBC-Brownsville is hereby instructed
to  remit  by  wire  transfer  any and all proceeds of the Judgment or from such
settlement, as the case may be, in immediately available funds to the account of
CEC  set  forth  below:


<PAGE>
     Account  Number:     8612486589
     ABA  Number:         031000053
     Bank:                PNC  Bank
     Contact:             Mary  Wagner
     Phone:              (215) 575-6428

     If  you  have  any  questions  regarding this matter, please contact Ian T.
Bothwell,  Chief  Financial  Officer  and Treasurer, Penn Octane Corporation, at
(562)  929-6789  ext.  101.

                                   PENN  OCTANE  CORPORATION


                                   By:_______________________
                                   Name:
                                   Title:

<PAGE>