Our 85 turbo gets right around 20 mpg pretty much regardless of the way we
drive.

If the O2 sensor is the original, it is probably in sad shape. But that may
not be related to the fuel economy problem.

Start with a good cleaning of the throttle body and the Idle Air Control
(IAC) valve underneath it. They get *really* grody in the turbo versions
from inhaling crankcase vapors. Especially clean the idle passage in the
throttle body; count the number of turns and fractions as you screw the
plastic thumbwheel in, then remove it for cleaning the passage and reset it
to the original position when you are done. It isn't unusual to expend a
full can of carb cleaner on all that, but at least it should fix the cold
start stalling. Then you can recheck the fuel consumption.

BTW - if the temperature guage doesn't hang around 1/2 scale, replace the
thermostat with a genuine Volvo thermostat. I had nothing but bad
experiences with aftermarket ones, mostly fluctuations. Running cold will
kill the fuel economy.

Mike