Exclusive: President Bush in Saudi Arabia

In Riyadh today, the president participated in a traditional sword dance with one of the princes of the royal family. It was a public — and a little awkward — display of affection, all part of Bush's first visit to Saudi Arabia aimed at repairing strained relations between the world's biggest oil producer and the world's biggest oil consumer.

The president sat down with "Nightline" co-anchor Terry Moran at one of the vast royal palaces, and it became clear who holds the cards right now in the oil markets, with the price up near $100 a barrel.

The president, who once said he'd "jawbone" Saudi leaders into lowering prices, told Moran what he intended to say to King Abdullah on the topic in their meeting.

"I will say to him that, 'If it's possible, your majesty, consider what high prices is doing to one of your largest customers,'" Bush said. "In other words, the worst thing that can happen to an oil-producing nation is that the price of oil causes the economy to slow down, because that will inevitably lead to fewer purchases [of oil]."

Watch Terry Moran's full interview with President Bush tonight on "Nightline" at 11:35 ET

Bush said he's worried about an economic slowdown in the United States and around the world because of those high oil prices.

"These are smart people. They know that the price of oil can affect our economy, and they know that if our economy weakens and there's less purchasing power that it will affect their ability to sell barrels of oil."

Today, however, Saudi Oil Minister Ali Naimi said that Saudi Arabia would allow market forces to dictate oil production and prices. "We will raise production when the market justifies it," he said. "This is our policy."

When Bush took office, the United States imported just about 53 percent of its oil. Today, that number stands at 60 percent.

"That's why I've got these alternative energy projects going on that I think will make a difference," the president said. "They don't make a difference in the short term because we're talking about actually beginning to encourage people to change habits, such as using ethanol. And we're also not exploring for oil and gas in our own country like we should be."

'Something to Prove for Peace'

The president acknowledged that he had something to prove on this trip.

"I do, but it's not so much to prove for my sake. It's really to prove for peace," he said. "And I believe the time is right to push for a Palestinian state. The time is right because there's an Israeli leader who understands that and a Palestinian leader who understands that."

The president said he believes it is the right time to renew the Israeli-Palestinian peace process because "the environment has changed," both with the leaders involved and the support of the Arab world.

"It's going to be tough," the president said, but he believes that by the end of his term in office there will be a deal for a Palestinian state.

When asked whether that deal would address "core issues," for the first time the president said, "I do believe so."

"I have talked to these leaders face to face," he said. "I have asked them point blank, 'Do you understand how difficult these issues are?' Yes. 'Are you prepared to make the painful political compromises?' They say they are."

Despite that optimism, the president also said that he feels misunderstood in the Middle East.

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