We'll give teh 'Volvo only' shop benefit of doubt and assume they made a simple mistake, albeit a really ignorant mistake to make.
The bad running, the course of events that led up to the issue, and the compression results totally scream bad head gasket.
I expect you're looking at $100 in parts, and quite a good bit of labor time. $500 is totally reasonable, and totally worth it if the car is otherwise in good order.
Of course, as others have said, we're assuming you're not out of oil and that you were not driving in an abnormally abusive manner.
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-Matt I ♥ my ♂
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