It's clearly meant to be "smog" when you consider that The Hobbit is a commentary on the pursuit of wealth in Industrial Revolution-era England. The dwarves clearly embody the industrious Protestant work ethic that spurred this period, not to mention the focus on steam power and metallurgy that defined that period.
With their drive for more production, more output, comes the nasty byproduct of pollution that England had to deal with at that time, or "smog." The pollution got so bad that people's quality of living decreased, preventing them from actually enjoying the wealth they had created. This is symbolized by the mountains of gold being hoarded by the pollution itself, Smaug (smog).
Indeed, at one point Gandalf also notes that the insects he uses to summon the eagles have turned black, a clear nod to the
Peppered Moth and how it evolved during the Industrial Revolution.