In face of these developments, it seems strange that Israel would move in the opposite direction, antagonizing its Arab neighbors by authorizing a further expansion of settlements. The settlement issue is of crucial importance to Arab leaders because it represents the Arab's greatest concern regarding Israel. Perhaps the greatest spark for Israeli-Palestine tension is Israeli demographic trends. Arabs generally don't have a problem with Jews in the Levant. They have a problem with a rapidly increasing Jewish population. In fact, great demographic expansion correlate to more violence between Jews and Arabs. Saudi Arabia, the most important Arab voice on this issue, has stated if there is a settlement freeze, "we will be ready to talk to the Americans about taking this forward."Obama finds himself in a difficult position. The US has stated Israel must halt expansion of settlements, yet expansions continue. At the same time, Arabs will not negotiate until these expansions halt. This stalemate is likely to continue until an external shock changes the geopolitical balance between these nations. A change in the position of the US is unlikely, as that is completely unacceptable to Arab states and because US public opinion is not as pro-Israel as it used to be.
The stalemate is likely to continue for the following reasons. Israel cannot discontinue settlements for domestic political reasons. Israel has a strong conservative movement that will not allow compromise, unless they get something substantial in return, such as state recognition or a peace plan. On the other hand, the Arabs will not compromise until they get a significant concession first. The Arabs were badly burned during the last peace process, and are more skeptical this time around, the reason why they are insisting on a freeze to settlements before negotiating. As the FT points out here, Israel reaped a large peace dividend during the last major peace process without actually concluding a peace. During this time, from 1992 to 1996, diplomatic recognition of Israel went from 85 countries to 161 and the number of settlers increased by 50%. Also during this time, almost a million Jews from the former Soviet Union emigrated to Israel. Saudi Arabia was also burned in 2002, when it painstakingly had its Arab-Israeli peace plan endorsed by the Arab League (which cost Saudi Arabia a lot of soft power on the Arab street), only to have Israel reject it.
In conclusion, while Obama's soft power efforts in the Middle East have made a difference, there is little chance any progress will be made towards Arab-Israeli peace. The stalemate between Israel and Saudi Arabia will most likely be broken by an exogenous shock. One possibility is another attack from Hezbollah. Hezbollah has been steadily increasing its military position along the Lebanon-Israeli border. Israel could opt to attack Hezbollah to get to Iran, Hezbollah's backer, as Israel's options to stop an Iranian bomb are diminishing.