While this ticket hasn't got much love, there's clearly a need to resolve it from the response from people on the chef mailing list: http://lists.opscode.com/sympa/arc/chef/2012-04/msg00425.html
Many people are working round this problem in various ways and it's undoubtedly causing confusion for people, particularly new users.
As an initial triage step, can the documentation on knife configuration (http://wiki.opscode.com/display/chef/Knife#Knife-ConfiguringYourSystemForKnife) be updated with a warning to flag this potential gotcha for new users?
"WARNING: Precedence of knife configuration option parsing is not consistent, particularly within plugins. This may cause command line options to be ignored in favour of options set in knife.rb. Also note that not all options are read from both command line and knife.rb"