Yes, you need it.

The interface between the crankshaft and whatever you've attached to
it -- a flywheel, magneto drive-hub or dynamo hub -- is exposed to
full oil pressure. There's a drain-back channel but the oil doesn't
see it until it has negotiated the interface occupied by the thrust-
shims.

Volkswagen used a paper gasket between the crankshaft and the
flywheel, which worked well enough for the early engines (1100 &
1200). But the paper gasket proved inadequate for the 1300 engine and
in 1966 VW finally bit the bullet. A running change was made to the
crankshaft, reducing its diameter for the first 3/8" or so to
accommodate an O-ring, which was installed in the hub of the flywheel,
which was modified by deepening the recess and cutting a groove to
accept the O-ring.

No more leaks. Assuming the part being mated to the flywheel was
virtually an interference fit... AND the mating surfaces were
perfectly flat. If it wasn't a tight fit, or if the surfaces were not
flat, there would be some amount of 'wobble.' When the wobble is more
than a thou or so ( .001" ), measured just below the ring-gear teeth,
it's enough to pump a bit of oil, not only around the inner O-ring but
also past the outer chevron seal.

If you punched out an early engine to a larger displacement you could
expect the paper gasket to fail. Painting both surfaces with Permatex
would help but the real cure was to use an O-ringed crankshaft.

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So why is this important? Today is Sunday, the sixth of April.
Since last Thursday I've received three gasket-vs-Oring queries, which
tells me someone is leaking a bit of oil... somewhere. Now you know
why, and what you need to do to fix the drip. Of course, in some
cases the drip is the Instant Expert telling you that a paper gasket
and gob of Permatex is all you need. That was true for an early
crankshaft driving nothing more than a magneto adapter but is
completely invalid if you've got a later-model crankshaft to which
you've bolted a flywheel.

As always, listen to what the ENGINE has to say. Despite conventional
wisdom, the air cooled Volkswagen does not ooze oil from every pore.
If you've got a drip, the engine is telling you it was improperly
assembled.

-R.S.Hoover