Hi Steve,
I went through your post carefully and understand your demand to make the My files, Recent, Shared, Favorite options available to Add new item in a Playlist in SharePoint. But from my tests, it seems like I failed to reproduce the same behavior. Screenshot attached on left.
In this situation, to get the local video added in the playlist, please try to first upload it from local to Document folder and then right-click the "Add to playlist" option and see if it can work. Screenshot attached on right.

If the issue persists, please share me the required information for further troubleshooting:
- If the same issue will happen when you create new playlist in the same site and other new sites.
- If other site members will see the same behavior with missing options.
- If you can access OneDrive Online and upload local videos to there.
See: Upload and save files and folders to OneDrive - Microsoft Support
Please correct me if I made any misunderstanding and I will be here waiting for your updates.
Appreciate your time and patience. Hope you a nice day and stay safe!
Best Regards,
Mia