what is this ???

I put one on recently on my 273 re-gasket. No problems yet.

On a side note, a similar felt washer was used "in" the timing cover of my Studebaker V8. It along with a oil spinner was the front seal. I replaced it more than 30 years ago. Recently in a re-gasket for water pump and oil pan, I found it was completely gone, not a single fiber! There was no residue in engine. I think little bugs took it to build nests. Wool does not rot, so it might be something like that.