Supercritical water gasification is a promising technology in dealing with the degradation of hazardous waste, such as oily sludge, accompanied by the production of fuel gases. To evaluate the mechanism of Fe2O3 catalyst and the migration pathways of heteroatoms and to investigate the systems during the process, reactive force field molecular dynamics simulations are adopted. In terms of the catalytic mechanisms of Fe2O3, the surface lattice oxygen is consumed by small carbon fragments to produce CO and CO2, improving the catalytic performance of the cluster due to more unsaturated coordination Fe sites exposed. Lattice oxygen combines with •H radicals to form water molecules, improving the catalytic performance. Furthermore, the pathway of asphaltene degradation was revealed at an atomic level, as well as products. Moreover, the adsorption of hydroxyl radical on the S atom caused breakage of the two C–S bonds in turn, forming •HSO intermediate, so that the organic S element was fixed into the inorganic liquid phase. The heteroatom O was removed under the effects of supercritical water. Heavy metal particles presented in the oily sludge, such as iron in association with Fe2O3 catalyst, helped accelerate the degradation of asphaltenes.