For starters, lets look at why using warm oil, would you really want to use cold oil before a dive? As for why use olive oil there could be a number of reasons, for starters oil is more viscous than water and it would reduce the rate of movement over the skin, the oil would fore a layer that would reduce heat loss during the dive. Although I am not positive and too lazy to confirm oil is also poorer conductor of heat than water and since it is also not miscible in water, it will remain in the suit much longer than a most lotions. Why olive oil instead of canola? I'm not sure, it might have something toe do with the olive oil and the skin or maybe it has a higher viscosity than other cooking oils.
I agree it would make a mess out of a wetsuit, but I doubt it would ruin it. Soap and hot water would get it out pretty easily I imagine. I do know that ocean swimmers will put oil or grease on their bodies to help stay warm.
This isn't something I would try, but I could certainly see this as option if needed to up the insulating property of a wetsuit. I think in a drysuit it would just be a mess of no value.