When I try to put "CREATE USER" statement in my php file, I get this ridiculous message: "Access denied; you need the CREATE USER privilege for this operation".

For reference: I'm using Inmotionhosting server, which has the graphic tools MySqlDatabases, MySQLDatabaseWizard, phpMyAdmin, and RemoteMySQL. In "MySQLDatabases", I have selected "Add User to Database" option , added user "db_login", and checked "ALL PRIVILEGES" box to make sure that my administrative user db_login has all the priviliges.

///////////////////////////////////////////////////////////
<?php
addNewUser("user_id","user_pw");

function addNewUser($id,$pw)
{
$db = mysql_connect('localhost','db_login','db_password') or die("Couldn't connect to the database.");
mysql_select_db('my_database') or die("Couldn't select the database");
$query="CREATE USER " . $id . " IDENTIFIED BY PASSWORD " . "'" . $pw . "'";

$result=mysql_query($query) or die ('Query failed: '.mysql_error());
}

?>
//////////////////////////////////////////////////

What could be causing the problem?

probably you need admin privileges or not just privileges for a local database to be able to create user
check mysql website. it may help you
http://dev.mysql.com/doc/refman/5.0/en/create-user.html

I AM the admin becuase it is MY database. I HAVE the admin privileges. I CAN create users with MySQLDatabases tool, and still for some murky reason it does not allow me to create users with PHP/SQL. Anyway, I will get around this issue by having new users insert their user info with login and password into a table, and then I will assign them an access level and let the right users access/modify the other tables. This means I will be doing manually what should have been the database's job. It's OK with me, but I still want to know why it rejects my PHP command
$query="CREATE USER " . $id . " IDENTIFIED BY PASSWORD " . "'" . $pw . "'"; after I login with my id and password, which should in theory give me all administrative privileges.

do you use root password. if so then you should be able to create users. but normal database owners normally wouldn't be given permissions to create users using sql.

CREATE USER requires SERVER privileges to be granted to the user name that is creating calling the query.

Which user name are you trying with? Locally on the MYSQL server or from remote web server? You need to grant the permissions to database user you are using. The same database user at local mysql server and another remote server can be different.

You need to have CREATE USER permission to create the user for the database.

I believe "Create user" requires root access to Mysql. From your steps, it seems that you have assign privileges db_login user to particular database (Insert, update, select etc. but not Create user).