narrower tires have less rolling resistance with the road and less wind drag.
More powerful engine? Yes and no. If you had a lot of power, you could stay in overdrive more, and keep the RPMs lower, which will give you better fuel mileage. However, you will be very tempted to use that power all the time, which will KILL your mileage. Bigger more powerful engines require more fuel to make that more power. So yes, and no.
A 6.2L or 6.5L swap is about the best bang for the buck fuel mileage swap in a K5.
Otherwise, give up and buy a Honda dude. You will never make a brick on wheels into a big fuel mileage machine. If fuel mileage is killing your wallet, you may well just have to lose the K5. A sad fact of the modern world. Buying a 4 banger commuter vehicle pays off in the end. And if you can afford it, you could always buy a nicer newer car to be comfortable, get good mileage, and keep the K5 for playing.