How does addition of oil help in reducing the hotness of chilli powder?

The chilli pepper derives its sharpness or hotness from a chemical compound called capsaicin. Its chemical formula is 8-methyl-N-vanillyl-6-nonenamide and the chemists write it as C{-1}{-8}H{-2}{-7}NO{-3}. In a chilli pepper, most of the capsaicin is found in the white placenta (or ribs) holding the seeds to the pod wall and in the septa separating different chambers of the chilli.Of course, it is also found in the other parts, but to a much lesser extent. The hotness of chilli differs from variety to variety. The hotness property is expressed in the `Scoville Heat Unit (SHU)'. The yellow capsicum and the Italian variety of sweet capsicum is placed at 0K and the usual hot Indian red chilli scores a 500K in the SHU. There are special varieties, which can go even up to 8000K. The pure chemical Capsaicin has a SHU value of 16,000,000K. Even one drop of pure capsaicin in about 5litres of water would produce blistering of the tongue. 

The sharpness of chilli powder is felt when the concentrated capsaicin is locally released into the saliva of the mouth. Actually, this compound has no flavour or odour but acts directly on the pain receptors in the mouth and throat causing the eyes to water and the nose to run, and even leads to perspiration on the skin. The extreme case of such event is called chemical burn that can last for several minutes. It is advised, therefore, that contact of capsaicin with sensitive skins of eyes and nose should be avoided; and hand should be thoroughly washed before using in the toilet. Capsaicin is a crystalline compound in the monoclinic class. It is slightly soluble in water, but is readily soluble in oil and other organic solvents. So when oil is added to the chilli powder, the capsaicin gets dissolved and distributed in the oil and coats a larger area of the mouth. Thus the hotness appears reduced on addition of oil.