What level should this spell be?

[Nareau]

False Fog
School illusion (figment)

CASTING
Casting Time 1 standard action
Components V, S, F (a bit of moss)

EFFECT
Range long (400 ft. + 40 ft./level)
Effect fog that fills four 10-ft. cubes + one 10-ft. cube/level (S)
Duration concentration
Saving Throw Will disbelief (if interacted with); Spell Resistance no

This spell creates a swirling mist around you, obscuring all sight, including darkvision. All creatures within the fog have total concealment against those who do not succeed on their Will save.

The caster (and anyone who makes their Will save) can see clearly through the fog. The caster's allies gain a +4 to this saving throw. As with other illusions, anyone besides the caster must interact with the cloud (or study it carefully) to be allowed a saving throw.

 

[Jimlock]

This spell creates a swirling mist around you, obscuring all sight, including darkvision.

So... are you effectively blinded?

All creatures besides the caster within the fog have total concealment.

Umm... I don't think I understand this... Doesn't the caster get total concealment?

 

[Nareau]

Oops! Sorry about that, not what I meant to say. Fixed now.

So... are you effectively blinded?

The idea here is that you can see through the fog, but your enemies can't. They have to interact with it, then make a Will save in order to see through it.

 

[Jimlock]

All creatures within the fog have total concealment against those who do not succeed on their Will save.

What about creatures outside of the fog? Do they have total concealment against those who do not succeed on their Will save?

They should, because those who failed their save should be effectively blinded:

Blinded
The character cannot see. He takes a -2 penalty to Armor Class, loses his Dexterity bonus to AC (if any), moves at half speed, and takes a -4 penalty on Search checks and on most Strength- and Dexterity-based skill checks. All checks and activities that rely on vision (such as reading and Spot checks) automatically fail. All opponents are considered to have total concealment (50% miss chance) to the blinded character. Characters who remain blinded for a long time grow accustomed to these drawbacks and can overcome some of them.

If you do not want to render them blind, you should make the fog less dense, in a sense that those captured inside can see around them in close distance just like in Obscuring Mist:

Obscuring Mist
Conjuration (Creation)
Level: Air 1, Clr 1, Drd 1, Sor/Wiz 1, Water 1
Components: V, S
Casting Time: 1 standard action
Range: 20 ft.
Effect: Cloud spreads in 20-ft. radius from you, 20 ft. high
Duration: 1 min./level
Saving Throw: None
Spell Resistance: No
A misty vapor arises around you. It is stationary once created. The vapor obscures all sight, including darkvision, beyond 5 feet. A creature 5 feet away has concealment (attacks have a 20% miss chance). Creatures farther away have total concealment (50% miss chance, and the attacker cannot use sight to locate the target).

A moderate wind (11+ mph), such as from a gust of wind spell, disperses the fog in 4 rounds. A strong wind (21+ mph) disperses the fog in 1 round. A fireball, flame strike, or similar spell burns away the fog in the explosive or fiery spell’s area. A wall of fire burns away the fog in the area into which it deals damage.

This spell does not function underwater.

First you should find out what a creature suffers in the fog in (respect to vision). This will define the advantages of those who make the save (including the caster).

 

[Greenfield]

It's just a variation on Silent Image. The only difference is the very limited nature of the illusion presented.

You're creating an illusion of a Fog Cloud spell.

It's 1st level, and a weak 1st level at that.

 

[Whizbang Dustyboots]

It's just a variation on Silent Image. The only difference is the very limited nature of the illusion presented.

You're creating an illusion of a Fog Cloud spell.

It's 1st level, and a weak 1st level at that.

My thoughts exactly. I'm not sure there's any reason to not just use Silent Image instead, especially as preparing that spell opens up the ability to use that slot for a different illusion, as needed.