Noam Chomsky did a review of Obama's plans for the Middle East on Democracy now. It is always dangerous to write something before you read what Chomsky says about the same thing. Chomsky adds a lot of details, and especially notes the absence of specifics regarding all the Israeli crimes that the U.S. effectively supports and enables, the settlements, the wall, etc.
The main difference relative to what I wrote earlier however is that Chomsky thinks that the talk of two state solution will remain as empty as it was during the Bush years. That would mean that Israel will continue the occupation as it is now, post Second Intifada, with the occasional meaningless "peace summit," and the same policies of the Sharon and Olmert government will continue under Netanyahu. In contrast, I interpreted Obama's words to suggest interest in returning to Clinton's policies. Let's review the case.
There is certainly a possibility the Obama will follow Bush completely, but at least the rhetoric suggests that Obama wants to return to the strategies of the Clinton years. That would require building a much better trained, armed and effective PA that would take a larger role in the oppression of Palestinians and get the IDF out of direct contact with the Palestinian population. In return there would need to be carrots for the PA, both in terms of symbols and in terms for welfare for for top boys and funds for influence peddling projects. Carrots might go from red carpets all the way to the (unlikely) freeze on settlements.
In favor of this are the fact that Obama's team is drawn from the Clinton administration and this was their game. Also in favor of this is the mounting exasperation in Arab and European capitals and the expectation that Obama "does something" to at least release some of the mounting public pressue. Finally, in favor of this is Obama's compassionate image that will be hurt if he were to stand aloof.
But there are good reasons not to try. First, returning to the Oslo model will require not just buying off Palestinians. There would be strong opposition to it in Israel, and from the governing (soon) Likud constituency. That will stress Israeli politics and the likely result would be massive violence against someone, most likely Palestinians. This is how Israel reacts to attempts to rein it. Obama will be forced to look like a loser or spend significant capital, both political capital and real cash, to overcome the internal Israeli opposition. There will also be opposition within Palestinian society, and Obama's administration would need to be blind not to recognize that the PA doesn't and will never have Arafat's legitimacy. Chances of success are not good, even for a very short period.
What would they do? One strategy they could fall on is to split it. They will forge ahead with new "bold" propositions, and when they run into the wall they will try to make Hamas take the blame for the inevitable failure, as Clinton did with Arafat in 2000. There is little doubt that the Obama administration would prefer to do nothing. It will act to the extent that it is pushed, so a lot rests on who pushes it and how hard.