Your sick buddy and I think alike. I'm currently building a 2WD '68 CJ5 with a Hercules 3.7. This one came out of an '83 Ford stepvan. It has a close ratio T19 behind it. I'm going to use that and keep an eye out for a M5R2. The Herc in current form will bolt to any trans setup for SB Ford.
I imagine mpg will be in 30s.
The short of this project:
White-Hercules 3.7TD, T19, Ford 9" rear, tube converted '98 Dodge D44 front, GM hydroboost, GM tilt column, Saginaw PS.
I'm not lowering it. The way I use the Jeep I need clearance but not really 4x4. I also don't need interstate capability so OD is not a necessity.
I'd suggest starting with a '72 or later CJ5. They should be perfect for swapping in a Herc/Cummins/similar. The '68 is a bit too short between grill and firewall so the firewall is going back 3". This just happens to be the amount AMC added in 1972 model year, IIRC.
I'm retubing the Dodge Dana 44 because it will hold the weight, I got it cheap, and it provides easy to get disc brake parts. The retube will result in the front track the same as the rear, and the pattern on both it and the 9" is 5 on 5.5.
Ken