So I am blaming all of the problems on this:

This is what the inside of my heater box looks like after I shortened it from the stock type 4 to fit into a Beetle. I never had any issue with it before, but I've never driven it that hard either. The black lines show the flow path and the red lines show the huge reduction in pipe size over a short distance on the #1 exhaust. So I built new headers and gave up on heat from the exhaust system (I'll figure out heat at a later date).

These should flow much nicer and reduce the backpressure on the #1 and #2 exhaust greatly. Went from about 7/8" ID to 1 3/8" ID.
Why I blame the heat exchanger is because it was causing too much heat build up on the right side of the engine due to the lack of flow. That caused several things to happen. The rings over heated losing some tension allowing blow by and scoring the pistons. More heat got into the crankcase increasing the oil heat issues. It also caused the resistor in the spark plug terminal to burn out, causing the ignition problem. I only had a head temp sensor on the other side of the engine and I don't think I really want to know what the temps were on the #1 side (scary hot 8O ).