O'Sullivan, who was on the losing end as coach in New Zealand in 2006, said if Ireland played the All Blacks again next week, they would probably win again.
"But," he warned, "come the World Cup, things will even up again.
"There is a lot of water to flow under the bridge between now and next year," he told the BBC.
"Everyone gets more focused for the World Cup, but I do think we're right up there.
"At the moment, we are the better team. There's no debating that.
"It's a very unusual place for New Zealand to be, and a very unusual place for Ireland to be, but we're No1 in the world today for a very good reason," he said.
O'Sullivan said comments that Ireland may have peaked too soon was off the mark.
"You can't say, 'we don't want to win that Test series because we might peak too soon'.
"You've got to take what's in front of you. You've got to take the historical moments because they will stand us in good stead down the track.
"When we play New Zealand again, they are going to be more worried than we are," he said.
Ireland had shown they were a team capable of developing good gameplans and executing them while there defence had improved.
Again, O'Sullivan pointed out that first five-eighths Johnny Sexton was crucial to the side, and for that reason Ireland were vulnerable if they lost him for any reason.
O'Sullivan was also concerned at the lack of depth in the front row.
"Our two props [Andrew Porter and Tadhg Furlong] had to play 70 minutes of rugby. Very few international teams do that, so we are struggling a little bit in terms of depth in the front row.
"Injuries, loss of form, bad luck…all those things can hamper you, but you can't think too much about that.
"You've just got to keep building and building, and putting fuel in the furnace for the next big test," he said.