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It probaby refers to just that-a gas leak that occurs each night, and, as O. Henry elegantly yet sarcastically puts it, "would steal forth to frolic in the highways". This leak is later referred to when Katy asks John to "write to the gas comany about the meter". It is one description in a very long series of details on what happens every single night around their flat, meant to emphasize the predictablity and monotonous nature of their life, and made more significant when that daily routine is disrupted when Katy leaves.
The expression means the intoxicating environment at night in and around the Frogmore Flats.The rocking music,cocktail parties,people leaving for night clubs etc make the place full of endless joy and celebration.It appears as if some unidentified mesmerising gas extends its sway all over.
It probably refers to the smoke of the gas that pass out from the chimney in cold countries,and thus the smoke frolic or play in the highway by spreading all over the place.
It can be related with the sound of flute. Music is a pious term but here Perkins dislikes all the noises created by his neighbours at frogmore flats. thus a derogatory term....
The writer appears to be referring to the fact that many residents like John Perkins head for fun and frolic on the highways in the evening from Frogmore Flats.The gas leak may indicate the gasoline emission of their vehicles. It stands to reason that , in a typical demographic settlement,John Perkins is not the only resident to frequent the clubs at night.
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