Fwiw, I noticed timing was pulled when IATs were higher, but there’s no true knock detector involved. My guess is that the PCM predicts the detonation threshold.
For me, EGTs increased and power felt flat as well when timing was pulled. That all changed when IATs were significantly reduced (power came alive and EGTs dropped 150-200*.
Yup. In closed loop, air-fuel ratio is actively monitored and adjusted by the oxygen sensors. So if more air is getting in, the engine will notice and adjust. Likewise, if more fuel is being burned, it will adjust.
There are tables of preset values that the PCM uses as a baseline. The PCM "learns" the deviations from this table, and uses them in future actions.
Timing is more of an open loop philosophy, in that it isn't actively adjusted by knock sensors (the TJ does not have any), but it is adjusted by MAP, IAT, MAT (Manifold air temperature, which is approximated by a calculation involving estimated mass air flow, IAT, and ECT), ECT, runtime, among other factors.
Lower IAT and maintain ECTs at a stable level, and the computer will pull timing much less. When timing is pulled, you aren't burning any more or less fuel. However, you are extracting less power from that same amount of fuel - so a loss of efficiency. Cut the amount the computer pulls timing, and you can extract more power from the fuel you are already burning. If you're racing, that means you go faster. If you are cruising, it allows you to back off on the throttle and use less gas to maintain the same speed.
The absolute biggest gains I've noticed are at lower RPMs. For example, I can now easily accelerate up a small incline in 6th gear running 1,400 RPM. Meaning I can save additional fuel by keeping cruising RPMs so low that would cause the average forum driver to blow a gasket.