A detailed thermodynamic analysis was performed to demonstrate the fundamental efficiency advantage of an opposed-piston two-stroke engine over a standard four-stroke engine. Three engine configurations were considered: a baseline six-cylinder four-stroke engine, a hypothetical three-cylinder opposed-piston four-stroke engine, and a three-cylinder opposed-piston two-stroke engine. The bore and stroke per piston were held constant for all engine configurations to minimize any potential differences in friction. The closed-cycle performance of the engine configurations were compared using a custom analysis tool that allowed the sources of thermal efficiency differences to be identified and quantified. The simulation results showed that combining the opposed-piston architecture with the two-stroke cycle increased the indicated thermal efficiency through a combination of three effects: reduced heat transfer because the opposed-piston architecture creates a more favorable combustion chamber area/volume ratio, increased ratio of specific heats because of leaner operating conditions made possible by the two-stroke cycle, and decreased combustion duration achievable at the fixed maximum pressure rise rate because of the lower energy release density of the two-stroke engine. When averaged over a representative engine cycle, the opposed-piston two-stroke engine had 10.4% lower indicated-specific fuel consumption than the four-stroke engine.In a second analysis, the closed-cycle simulation was extended to a engine system model to estimate the pumping work required to achieve the operating conditions needed to reach a specified NOx emissions rate. Because the opposed-piston two-stroke engine has inherently lower peak in-cylinder temperatures than the four-stroke engine, lower intake pressure was required to meet the NOx emissions constraint and as a result lower pumping work was needed. At the simulated condition considered, the opposed-piston two-stroke engine had approximately 9.0% lower brake-specific fuel consumption than the four-stroke engine.