Jan. 15, 2008  -- 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.

"My image [is] 'Bush wants to fight Muslims.' And, yes, I'm concerned about it. Not because of me, personally. I'm concerned because I want most people to understand the great generosity and compassion of Americans," he said.

"I'm sure people view me as a warmonger and I view myself as peacemaker," the president said. "They view me as so pro-Israeli I can't be open-minded about Palestinian peace, and yet I'm the only president ever to have articulated a two-state solution. And you just have to fight through stereotypes by actions."

The president said he hopes to change that image by opening a dialogue and letting "the results speak for themselves."

"I mean, when this democracy in Iraq solidifies and emerges and is whole, people will understand what I meant about the democracy agenda. People will know that my view is not American democracy, but it's freedom based upon certain principles that honors the traditions and culture of the host country."

Changing Perceptions

Bush said despite Saudi Arabia's connection to some of the Sept. 11 hijackers and terrorism ideology in general, he views the Saudis as "our friends." He spoke of meeting with Saudi entrepreneurs and business leaders during his trip who worry that Americans view them as enemies, not friends.

"There's a lot of really good people here," Bush said. "Look, you can't deny the fact that some, a majority, of the terrorists came from Saudi, but you should not condemn an entire society based upon the actions of a handful of killers."

The president stressed the importance of fostering business connections and cultural and education exchanges between the two countries.

"If Americans are concerned about U.S. perceptions in the Middle East, the best way to defeat that perception is through opening up our colleges and universities," he said. "And I believe we can make sure that, as best as we can, terrorists don't come to our country, and at the same time, be more open."

The president said he was surprised by the "deep concern that people won't welcome Middle-Eastern investments into the United States. … And I found that in most of my stops, not the Israeli-Palestinian stops, of course, but in the Gulf, I found that to be the case. And it's disturbing to me."

As for his own perception at home, President Bush faces the worst approval ratings as he enters the final year in office, with only 32 percent of Americans saying they are happy with the way he is handling the job, according to a new ABC News/Washington Post poll.

"I really don't pay attention to your polls," the president said. "I haven't analyzed your polls, and you don't want a president making decisions based upon polls. We had a good end of the year when it came to working with Congress on the budget and keeping taxes low. And I'll have a strong agenda coming out of the State of the Union address. I intend to work with Congress to get it passed. And really what matters is the results, rather than paying attention to your polls."

The Freedom Agenda

The president says he still believes that freedom and democracy are possible in the region, and will ultimately be the way to bring an end to terrorism against the United States.

"Look, I know I've been accused of being a hopeless idealist. On the other hand, I don't see any alternative, if you believe it's an ideological struggle."

"The way to protect America in the short term is to use our intelligence services to find [terrorists] and bring them to justice. In the long term is to offer a better alternative than the status quo, or societies that don't give people their rightful place, or societies that don't listen to the demands of people."

"And so the freedom agenda is absolutely essential. And the freedom agenda doesn't develop in one man's term of office. It takes a while. My job is to plant the seeds. [The] truth of the matter is that freedom is advancing quite amazingly in the Middle East."

"The other thing is, if I could be perfectly blunt about it, I think people who say we can be free, but you shouldn't be, are elitist," the president added.

The president said that "elections themselves represent freedom," even when they put in power leaders who are against the interest of the United States.

At the same time, the president defended his support of undemocratic regimes in countries such as Saudi Arabia.

"The American president doesn't come and lecture somebody. The American president develops a relationship where he can work with somebody. And as I told you, his majesty is, he is modernizing his society. Is it going to meet somebody's standards sitting in Washington, D.C.? Probably not overnight. Can it eventually? Yes.… And for us to say that you can't have a democracy if you've got a king is just not right."

Primary Season 'Full of Surprises'

As for who will be the next president, Bush said, "It's early."

Bush had previously said he thought New York Sen. Hillary Clinton would be the Democratic nominee, but he told Moran that he's "through opining on it."

"The only thing I want to share with you is, on the Republican side and on the Democrat side, what looked like a done deal wasn't, and that the process is going to be longer than a lot of people assumed. … But I do know that this primary season is full of surprises, just like other primary seasons."

When asked to share his thoughts on the possibility of Sen. Barack Obama, D-Ill., becoming the first black president, Bush said, "I will campaign against him if he's the nominee, of course. … But it won't be in a personal way. I mean, you could have asked the same question on Hillary Clinton — first woman president."

During his trip, the president visited the Mount of the Beatitudes where, by tradition, Jesus is understood to have said the words, "Blessed are the peacemakers, for they shall be called the children of God."

When asked to respond to the fact that many Americans do not view him as a peacemaker, the president replied, "We'll see what history says. I happen to believe that the actions I've taken were necessary to protect ourselves and lay the foundation for peace. That's what I believe. But history — I've often said this — I don't think the history of my administration is going to be written during your time as a newscaster, or my time on Earth. I believe that it's going to take a while for people to determine whether or not the foundation of peace has truly been laid."