It takes hundreds of millions of dollars to get a two hour CG film vaguely near that quality, a real-time game, where AI has to react to the player is impossible.
I think you are mixing up "impossible" with "further down the road".
When talking simulations, computers will inevitably be able to simulate Earth and everything on it.
Will we see THAT in our lifetime? Maybe. Maybe not. (Leaning towards not)
But take a game taking place in a self contained environment, like lets say Bioshock 1's Rapture. I think a lifelike experience within that environment will be possible in the not to distant future. Where the Graphics and Animation are indistinguishable from reality.
AI is an iffy road in ALL fields not just gaming.
10 years from now we could have AI more intelligent and human like than human beings themselves. Or we could just have super advanced Watson Like supercomputers that still don't think or at like humans at all.
Edit: And since you mentioned dreams I have to throw this in there. Many believe we will have a (much more than now) symbiotic relationship with tech in the future. We are already decrypting thoughts in peoples brains into words and images today, in the future I think technology will be used in conjunction with the brain to achieve things not possible otherwise, and increasing our ability to render lifelike environments instantly. (Imagine instead of booting up a console, you close your eyes and take a simulated vacation to Italy (that in reality only lasted a few hours).) using the power of Computers combined with the power of the mind. Once we reach the point of being able to really harness the power of computers using our thoughts, the development and speed at which technology evolves will reach a singularity and by that point, video games will be one of the less interesting things on our minds.
Sadly I am doubtful we will see THAT in our lifetime, though I do see it as happening in the next 100-150 years. (Crossing fingers though)