The world, as defined by American car buyers, is getting smaller and less expensive.

Volatile fuel prices, the unstable U.S. economy and the growing array of available fuel-efficient vehicles have sparked a shift in consumer behavior, Chrysler LLC, its dealers and auto industry observers say.

“We’ve seen people come in with a lot of reality on their minds,” says Bill North, general manager of King Cotton Chrysler Dodge Jeep in Covington, TN.

Historically, North says, lease customers ask, “How much car can I have for my $500?”

Now, they arrive at the dealership on a mission to satisfy specific needs, such as better fuel economy. And the list of functions that meet those needs often are found on smaller, less-expensive vehicles, North tells Ward’s.

“These fuel prices are changing people’s lifestyles,” he says.

The national per-gallon price of regular gasoline is $3.29, according to the American Automobile Assn. This time last year, it sold for $2.70.

Chrysler’s North American sales chief calls the change in consumer behavior “trading down.”

“We see a segment shift away from some of the bigger (leases),” Steve Landry says, referring to the monthly payments associated with vehicles such as the Jeep Commander and Chrysler Aspen fullsize SUVs.

While March sales of the new-for-’07 Aspen were flat, according to Ward’s data, Commander deliveries fell 38.7%.

Meanwhile, Chrysler’s compact-vehicle trio – the Dodge Caliber small car and its cross/utility vehicle platform-mates Jeep Compass and Jeep Patriot – posted their highest-ever combined sales total in March, the auto maker says.

According to Ward’s, their sales rose 18.6%, 37.0% and 286.2%, respectively, compared with year-ago.

And it is no coincidence that these products feature Chrysler’s fuel-efficient 4-cyl. World Engines. J.D. Power says March saw more vehicles sold with 4-cyl. engines – 39.6% – than any month since the industry consultant began tracking that information in 2002.

Rising gasoline prices are a factor in this trend, but so is the auto industry’s response to high fuel prices, says Tom Libby, senior director of industry analysis. “There are more and more vehicles coming on to the market with 4-cyl. engines,” Libby says.

Model-year ’07 marked the third annual volume increase for 4-cyl. engine installations among light-vehicles built in North America, according to Ward’s data.

Related document: % Engine Installations on U.S. Domestic Cars and Lt. Trucks, '07 Model Year

Says North: “We sold more Dodge Calibers than we’ve ever sold in a month. We sold out of our Patriots. We sold down to one Compass.”

This represents a “breaking point” for the U.S. market, he says.

“These people who are driving a Chevrolet Trailblazer, a GMC Envoy, a Jeep Liberty – they went to Compasses; they went to Patriots; they went to Calibers,” North says. “Although most of (them) have three people in their family, there’s only two that ever ride in the car together. (They) are saying, ‘Right now, I’m not going to waste money hauling this empty car around.’ That what seems to be moving the market.”

John Scott, general manager of Snethkamp Chrysler Jeep in Redford, MI, agrees – up to a point.

“They are more mileage conscious,” Scott says of consumers. “But I think this is temporary because of the economy.”

Feedback from J.D. Power’s most recent study of buyer motivation suggests fuel economy has not taken hold of consumer consciousness. It ranks eighth out of 20 key influences, trailing factors such as styling, performance and dealer relations, but outpacing safety.

Chuck Eddy, owner of Bob and Chuck Eddy Chrysler Dodge Jeep in Austintown, OH, is even more skeptical that the U.S. market has turned a corner.

“My used-car business is better, which is usually a sign that people are pulling back a little bit,” Eddy says. “I had a record Caliber-Compass-Patriot month. But it’s not because people are coming in and saying, ‘I don’t want the big car anymore.’ Our three entry-level cars are kicking in because of our incentive package. Plain and simple.

“When the price point’s right, the consumer gobbles these cars up,” he says, adding his dealership was offering spiffs as high as $2,000 to move Calibers.

But his dealership also benefited from a promotion tied to the Cleveland Auto Show. “We had a great month last month,” Eddy says.

Not so for Chrysler as a whole. The auto maker’s sales fell 13.5%, according to Ward’s data, which is adjusted for sales days.

The auto maker’s flagship Dodge Ram pickup line suffered a 27.5% decline. Rising diesel prices were a contributing factor, Chrysler’s Landry says.

A significant percentage of Ram Heavy Duty pickups are being sold with a new diesel-powered 6.7L I-6 supplied by Cummins Inc., according to the auto maker.

The AAA calculates the national per-gallon price of diesel fuel is $4.03 – more than 40% higher than the $2.86 pump price in March 2007.

That difference was enough to dissuade would-be buyers whose needs, unlike the buyers of Dodge’s new chassis-cab trucks, are less urgent, Landry says.

“When I think heavy-duty truck, I’m thinking cowboy-ranchers,” he says. “They did not buy in the month of March (because they) have the sustainability to wait and come back in the market at will.”

But Landry is not discouraged. The delay only creates pent-up demand.

“They eventually have to haul,” he says.

However, rising diesel prices were only part of the story behind the soft market for the Ram Heavy Duty. One Texas dealer blames soot-buildup problems associated with the new engine, which is actually ahead of its time in terms of emissions-mitigation. Launched in ’07, it was then – and is now – compliant with federal emissions regulations that don’t take effect until 2010.

Two technical service bulletins quickly were followed by a fix, Chrysler confirms.

Spokesman Nick Cappa says the problem was reported by a handful of owners whose driving patterns included long periods of engine idle. The fix involved a recalibration to allow for soot ignition under such conditions.

“I think that’s behind us,” North says. “We sold three diesels last month, which is about what we normally sell.”

Echoing Landry’s observations, he says “casual” diesel buyers were changing their habits in March.

“The guy who bought a diesel because it’s big and tall and makes a lot of noise and has a lot of power and he pulls his boat with it twice a year, he traded his diesel off,” North says. “He’s getting out of that and going to the gas rigs.”

Despite soaring diesel prices that have seen commercial truck drivers stage protests, Chrysler remains optimistic about the prospects for the fall of next year, when it launches a light-duty pickup powered by another new Cummins engine.

“Hopefully, most of the economic effects are behind us by then,” Landry says. “We’re still very bullish.”

Landry also uses Chrysler’s monthly sales teleconference to squelch persistent rumors the pudgy Compass is ripe for elimination as the auto maker streamlines its showroom. “It’s going to be a vehicle in our lineup for quite awhile,” he says.

In addition, Landry says there will be no “knee-jerk” reaction on the production front. The three vehicles are assembled at Chrysler’s plant in Belvidere, IL, where – until January – there were three shifts.

Today, Belvidere is running on two shifts.

However, expect Chrysler to shift its product-development strategy more toward cars. Product guru Frank Klegon has said the ratio, going forward, will be 60:40 in favor of truck designs from the current 70:30 split.