“uninitialized constant Encoding” using rvm, ruby 1.9.2, bundler and passenger

Question

I am at wit's end here and am turning to you all for some help on this f*#$^ encoding issue.

I am running on a private server with root permissions on Dreamhost. Here is a bit about my environment and versions.

$ `which ruby` -v
ruby 1.9.2p180 (2011-02-18 revision 30909) [x86_64-linux]
$ `which bundle` -v
Bundler version 1.0.15
$ `which rails` -v
Rails 3.0.9

Aside from this error, my rails app runs fine without issue. However, when I try to change the encoding a string by using the encode method it:

NoMethodError: undefined method `encode' for "foobar":String

encode should be defined but it is not! Encoding is found if I try in irb:

$ irb
ruby-1.9.2-p180 :001 > Encoding
 => Encoding
ruby-1.9.2-p180 :002 > "foobar".encode('utf-8')
 => "foobar"

But if I try using the rails console through bundle exec, Encoding is not found:

$ bundle exec rails c staging
Loading staging environment (Rails 3.0.9)
ruby-1.9.2-p180 :001 > Encoding
NameError: uninitialized constant Encoding
    from /[REDACTED]/shared/bundle/ruby/1.8/gems/aws-s3-0.6.2/lib/aws/s3/extensions.rb:206:in `const_missing'
    from (irb):1
ruby-1.9.2-p180 :002 > "foobar".encode('utf-8')
    NoMethodError: undefined method `encode' for "foobar":String

Obviously the setup is not loading something correctly but I am not sure where to look to figure it out. What am I missing here?

UPDATE 6/19/2011

As Ryan Bigg pointed out, it is curious that the directory path for the gems is 1.8. However, running bundle exec shows that bundler is using the correct ruby and rails versions:

$ bundle exec which ruby
/path/to/.rvm/rubies/ruby-1.9.2-p180/bin/ruby
$ bundle exec `which ruby` -v
ruby 1.9.2p180 (2011-02-18 revision 30909) [x86_64-linux]
$ bundle exec which rails
/path/to/shared/bundle/ruby/1.8/bin/rails
$ bundle exec `which rails` -v
Rails 3.0.9

Clearly something is wonky here… I just don't know what.

UPDATE 6/26/2011

Seamus asked for the $LOAD_PATH…

UPDATE 6/26/2011 (later)

Seamus asked for the Gemfile.lock and the pp ENV… In the ENV output, I found that the GEM_PATH was not correct. In my staging.rb environment file, I have:

GEM_HOME = "/home/[REDACTED]/.rvm/gems/ruby-1.9.2-p180@[REDACTED]"
GEM_PATH = "/home/[REDACTED]/.rvm/gems/ruby-1.9.2-p180@[REDACTED]:/home/[REDACTED]/.rvm/gems/ruby-1.9.2-p180@global"

…which is obviously not being honored. Nowhere else in my code is there a mention of GEM_HOME or GEM_PATH

UPDATE 6/27/2011

Seamus asked for the .bundle/config contents…