In 2006 the Star Princess there was a fire that was caused by someone smoking in a balcony room and flicking it off the ship. Wind blew it back on to the ship and cause a fire. Many had smoke inhalation and one older man died of a heart attack. Here is a link to that article.
The man you described was smoking next to an oxygen tank, that is dangerous it's to bad you didn't report him. He could have blown up part of the ship. However, I looked up Princess's policy and it surprised me.
I guess they are waiting for a ship to burn down before updating this policy.
Smoking is not allowed in the dining rooms, or any other food service area, or in the show lounges and theaters. Smoking is permitted in staterooms, stateroom balconies, and designated areas. As a courtesy to your fellow passengers, please refrain from smoking pipes and cigars in all public rooms.